Indeterminate cleavage

Incremental Cost

The Incremental Cost is an economic term that refers to the change in total cost that arises when the quantity produced changes by one unit. It is the cost of producing one additional unit of a good or service. This concept is used in the field of economics, accounting, and financial management to aid in decision making, pricing, and optimizing production levels.

Definition

The incremental cost, also known as the marginal cost, is calculated by dividing the change in total cost by the change in the quantity of output. It is a fundamental concept in microeconomics and managerial accounting, as it helps businesses determine the most cost-effective level of production.

Calculation

The formula for calculating incremental cost is:

Incremental Cost = Change in Total Cost / Change in Quantity

This formula is used to determine the cost associated with producing additional units of a product or service. The change in total cost is the difference between the total cost of producing a certain number of units and the total cost of producing a different number of units. The change in quantity is the difference between the two levels of production.

Applications

Incremental cost is used in various fields and applications. In business, it is used to determine the optimal level of production, where the incremental cost equals the incremental revenue (marginal revenue). This is known as the profit-maximizing level of output.

In public policy, incremental cost analysis is used to evaluate the cost-effectiveness of different policy options. For example, it can be used to determine the most cost-effective way to reduce greenhouse gas emissions.

In healthcare, incremental cost-effectiveness ratio (ICER) is a statistic used in cost-effectiveness analysis to summarize the cost-effectiveness of a health care intervention.

See also

• Marginal cost
• Cost-effectiveness analysis
• Microeconomics
• Managerial accounting