This marginal cost calculator helps you calculate the cost of an additional units produced. Marginal cost is the change in cost caused by the additional input required to produce the next unit. It may vary with the number of products provided by the company. Based on this value, it may be easier to decide if production should increase or decrease. You may find a marginal cost calculator under different names, such as an incremental cost calculator or a differential cost calculator, but they are all related to the same topic. However, marginal cost is not the same as margin cost! In this article, you can find more details on how to calculate the marginal cost, and the marginal cost formula behind it.
How to calculate the marginal cost
The steps below will help you understand how to calculate the marginal cost:
- Find out how much your costs will increase once you produce any additional units;
- Think about how many additional products you would like to create;
- Divide the additional cost from point 1 by the extra units from point 2; and
- Thats it, you have calculated the marginal cost!
Below you may find the marginal cost formula if you prefer a mathematical approach.
Marginal cost formula
The formula for the marginal cost is quite simple:
MC = ΔTC/ΔQ
MC - marginal cost;
ΔTC - change in the total cost; and
ΔQ - change in the total quantity.
For example, imagine that your company produces chairs. Every month there are new 10,000 chairs created, which costs the company a total of $5,000. You may wonder how much it would cost to produce an additional 2,000 chairs, and, if so, you should use the marginal cost calculator. If 12,000 chairs costs $5,500, input this data into the marginal cost formula from above:
MC = ΔTC/ΔQ = (5,500 - 5,000) / (12,000 - 10,000) = 500 / 2,000 = $0.25
What the tells us is that it costs your company $0.25 to produce chair number 12,000. You may wonder why this final chair costs less than than the cost per unit for 10,000 chairs. To understand this, you should learn more about economies of scale.
Economies of scale
As you increase the number of units produced, you may find that the cost per unit decreases. This is because it is cheaper to create the next unit - our marginal cost, as your fixed costs remain unchanged. For example, you do not have to pay more for your warehouse if you produce one more unit of the product (unless it is more than your warehouse's capacity). Your additional cost of producing one extra product depends mostly on the value of the product itself - materials, workers wages, etc. Because of that, your marginal cost may decrease.
Using this calculator will help you calculate the cost of the next unit, and decide if it is worth it to increase production. Once you choose to change your output, you may find it encouraging to calculate your new potential profit!
You may wonder if increasing production is always profitable. Well, that depends on your capacity. Sometimes you may incur additional costs, like a new production machine as the one you currently have is not able to produce any more product over a specific period. You may find it useful to read the next section to understand how to find the most profitable quantity to produce.
How many units should I produce?
Knowing how to calculate the marginal cost is the first step towards finding the best quantity to produce. The second step is to consider marginal revenue. This value is calculated similarly to marginal cost, but, instead of additional cost, it uses the additional revenue the extra unit produced, ΔTR:
MR = ΔTR/ΔQ
To find the perfect quantity, you have to find the value for which marginal cost, MC will be equal to marginal revenue:
MC = MR
You can think about it in another way - for any change in quantity, the new marginal cost and marginal revenue would be the same, so it is enough to compare the change in total cost and the change in total revenue:
ΔTC = ΔTR
Use our break-even calculator to go even deeper into this subject!