Incremental Cost

Incremental cost refers to the additional cost incurred by a company or organization when producing one additional unit of a product or service. It is the difference in cost between producing one more unit and producing the current level of output. Incremental cost can also be referred to as marginal cost.

Incremental cost is an important concept in business decision-making, particularly when it comes to pricing decisions and production planning. By understanding the incremental cost of producing one more unit of a product, a company can determine the optimal production level and set prices that maximize profits.

For example, if a company is producing 100 units of a product and the incremental cost of producing the 101st unit is $10, then the company may decide to produce the additional unit only if it can sell it for more than $10. Similarly, if the company is considering reducing production to 99 units, it would need to consider whether the reduction in incremental cost is greater than the reduction in revenue from selling one less unit.

Incremental cost can also be used to evaluate the cost-effectiveness of various business strategies or investments. By comparing the incremental costs and benefits of different options, a company can make informed decisions about where to allocate resources and invest in growth opportunities.