Marginal cost definition

Marginal cost, also known as incremental costs, is a term used to describe the cost of producing the next unit of a product or service immediately after the start-up or restart phase of a production. Marginal cost determination is an important analytical tool when developing any product or service because it differentiates the production units from the early units that are tied to the start-up phase costs.

For example, if it costs $100 to produce the first 10 widgets but it costs $104 to produce 11 widgets, the start-up cost is $10 each for the first 10 widgets, but the marginal cost of the 11th widget is only $4 ($104-$100). If the total cost for 12 widgets is $106, the marginal cost of the 12th widget is $2 ($106-$104). Many processes, like printing, have high start-up unit costs, but much lower marginal costs once high-speed, repetitive production is established.

In research and development terms, a single prototype may cost $100,000 to produce, but the marginal costs of a production unit might be estimated at $1.00 each.