HumanBookkeeping.com™ can help. We are expert bookkeepers that can help your small business with its bookkeeping needs. Here’s a short explanation of what Marginal Cost means. If we can be of more help explaining what Marginal Cost is or if we can help you with any of your small business bookkeeping needs, give us a call at 888-994-8626(888-99HUMAN).HumanBookkeeping.com™ provides a way for small businesses to have outsourced bookkeeping at a significant savings. We provide our clients with pre-printed envelopes. You stuff the envelopes and our expert team does the rest with detailed reports and timely compliance support. Not to mention, you now have a team of experts at your disposal should you have questions or last-minute needs. Let’s start with answering what Marginal Cost means:

Marginal cost is another economic cost category. Marginal costs are the incremental costs needed to change the status of an item.

This is the exact opposite of sunk costs, which are costs that have already been spent and cannot be canceled. For example, a company has rented a warehouse. The cost to rent the warehouse is a sunk cost if it cannot be canceled.

The company is considering manufacturing sports equipment for the duration of the lease. The marginal cost would be the additional costs needed to create the sports equipment. This categorization can help decision making.

For example, the total cost of the lease was $10,000. The marginal cost to manufacture sports equipment for the duration of the lease is $5,000. The sports equipment is expected to generate $12,000 in revenue.

If the company only has two options, manufacture sports equipment, or leave the warehouse empty, the best course of action is to manufacture. This is the best action since the marginal revenue exceeds the marginal cost. For analysis purposes, the sunk costs are irrelevant. Here is a detail of the calculations showing this:

  • Empty Warehouse: -10,000, with no revenue. Total loss of $10,000
  • Manufacture: -10,000 – 5,000 + 12,000 = -3,000. Total loss of $3,000
Although the company is still losing money, since marginal revenue exceeds marginal cost, the company will lose less money by manufacturing. The marginal benefit is $7,000. (Marginal Revenue – Marginal Cost = 12,000 – 5,000 = 7,000.)Need more information or help? Don’t hesitate to give us a call right now at 888-99HUMAN.

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