How to Calculate Marginal Cost?
The marginal cost formula is the way if you are looking for how to find the marginal cost. Professionals working in a huge array of corporate finance roles compute the incremental cost of production in the context of routine financial analysis. We can use marginal costs for production-based decisions like if the price you charge for a product is higher than the marginal cost, then revenue will be higher than the added cost and it is thus rational to continue production. However, if the price asked for pay is less than the marginal cost, then you will lose money and production shall not expand.
Below is the marginal cost formula economics as well as used in mathematics:-
Marginal Cost Formula is: Marginal Cost = (Change in Costs) / (Change in Quantity)
Marginal Cost (MC) = △TC/ △Q
Where,
△ = change
TC= Total Cost
Q= Quantity
Uses and Relevance of Marginal Cost Formula Economics
In economics and business, the Marginal Cost Formula is widely applicable in financial modelling in order to optimize the generation of cash flow. Further Marginal Cost equation is relevant for the following:
To compute the incremental cost of production.
To make production and output decisions
To assess costs of goods manufactured (COGM).
Identify the changes in quantity, the number of goods made in initial production
Segregation of production analysis based on short-term, long-term, and longest-term goals.
Evaluating and utilizing resources in a better and profitable way as with quantity profit increase if the price is higher than this cost.
The valuations group may perform marginal cost calculation for a client
Investment banking analysts may include it as part of the output in their financial model.
Solved Example Marginal Cost Equation Example
Below is the marginal cost equation.
Example:
A manufacturing unit has a present cost of production of 4000 balls at Rs. 2, 00,000, and its output expectation is 5000 balls with the future cost of production of Rs. 2, 25,000. So the calculation of the marginal cost will be Rs. 25. Check below for particulars:
Here,
Marginal Cost (MC) = △TC/ △Q
Change in Total cost = Rs. 2, 25,000 – 2, 00,000 = $25,000
Change in Quantity = 5000 – 4000 = 1000
Now,
Marginal Cost = 25000/1000
=25
FAQs on Marginal Cost Formula
Q1. What is the Marginal Cost?
Answer: Marginal cost is the increase or decrease in the complete cost a business will incur by generating one more unit of a product or serving one more customer. If we plot marginal costs on a graph, we will generally see a U-shaped curve where costs begin high but decline as production increases, but then increase again after some point. For instance, in most production endeavours, the marginal costs of production declines as the volume of output increases due to economies of scale. Costs are lower since we can take advantage of discounts for bulk buying of raw materials, make full use of machinery, and involve specialized labour.
However, marginal costs will start to rise again where production will reach a point where diseconomies of scale.
Q2. How is Marginal Cost Important in Business Operations?
Answer: When carrying out financial assessments, it is significant for management to assess the price of each good or service being offered to consumers, and marginal cost assessment is one factor to consider. If the selling price for a product or service offered is higher than the marginal cost, then earnings will still be higher than the added cost – a rational reason to continue production.
