Learning how to calculate your incremental costs will help a small business reduce their costs during the year. The incremental cost is also known as the marginal cost. Calculating the incremental cost will help companies determine proper production amounts. The incremental cost is the additional cost for producing one more unit. This differs from average costs because the average cost spreads these additional costs over every unit. The incremental cost is only concerned with adding one more unit. For example, the cost difference between producing widget number 150 and widget number 151.
Calculate the cost to produce a specific amount of units. For example, a company adds together their production costs and finds to produce 150 widgets, it costs the company $1,400.
Calculate the cost to produce one more than than amount used in Step 1. In the example, a company adds together the production costs and finds to produce 151 widgets, it costs the company $1,435.
Subtract the production costs determined in Step 1 from the production costs determined in Step 2 to calculate the incremental cost. In the example, $1,435 minus $1,400 equals $35.
- calculator image by L. Shat from Fotolia.com