How to Find Marginal Cost

Chai65

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posted on 11 years ago — updated on 1 second ago

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Marginal cost is a production and economics calculation that tells you the cost of producing additional items. You must know several production variables, such as fixed costs and variable costs in order to find it. You can learn how to find marginal cost by using a formula.

Steps

Formula Preparation

Find or make a chart that shows your production costs and quantities. Make sure to include the following in your chart: Quantities. You will want to devote the first column in your chart to the total number of units produced. Your quantities can increase by 1, such as 1,2,3,4 etc. or they can increase by larger increments, such as 1,000, 2,000, 3,000 etc. Fixed costs and variable costs. During production there are certain costs, such as rent, that are fixed. Other costs, such as the cost of materials or labor hours, are variable according to the quantity. Make columns for each of the costs next to the quantities and input the figures.

Take out a pen, paper and calculator. You can also choose to do the work on a spreadsheet; however, you can understand the marginal cost calculation better if you write out the formula initially.

Solve Total Cost

Place another column labeled "Total Cost" to the right of your columns for "Fixed Cost" and Variable Costs."

Add together your fixed costs and variable costs for each number of units.

Enter the total cost calculation in the column, until all the costs for each unit increment are calculated. If you are using a spreadsheet program, you can insert a formula in the total cost column that will add together the fixed and variable costs on each row to calculate total cost.

Marginal Cost Formula

Write out the formula "Marginal Cost=Change in Total Cost/Change in Total Quantity."

Make a column to the right of total cost that says "Marginal Cost." Your first line in the column will remain blank, because you cannot figure out a marginal cost based on no units of production.

Find change in total cost by subtracting the total cost in row 3 from total cost in row 2. $40 minus $30.

Find the change in total quantity by subtracting the total quantity in row 3 from the total quantity in row 2. For example, 2 minus 1.

Plug your numbers into the formula. For example, Marginal Cost=$10/1. In this case, the marginal cost is $10.

Write your marginal cost in the column on the second row. Continue to subtract figures from the row above to figure out marginal cost for the remaining units of production.