Marginal cost is referred to as the cost that is incurred by any business when there is a need for producing additional units of any goods or services.
It is calculated by taking the total cost of producing the additional goods into account and dividing that by the change in the total quantity of the goods produced.
Marginal cost includes variable costs like material and labour. It also includes increments in any fixed costs such as overhead, administrative, and selling.
The marginal cost formula is used to optimise the cash flow generation and is represented as follows:
Marginal cost = (Change in cost) / (Change in quantity)
The change in cost is referred to as the change in the cost of production when there is a need for change in the volume of production. Manufacturing additional units requires more manpower and more raw materials, which causes changes in the overall production cost.
The change in quantity is the increase or decrease in the volume of production. There will be a difference in cost with an increase or decrease in production.
This concludes the article on the marginal cost formula, which plays an important role in production. For more such interesting concepts on economics for class 12, stay tuned to our website.