Calculate Marginal Cost

Marginal cost is a figure calculated from production costs for a short period of time. It takes into account the output and the total cost. To properly plot marginal cost, you will need to chart the output and costs on a spreadsheet and then use a formula to calculate the marginal cost. Follow these steps to calculate marginal cost.

Steps

Preparation

  1. Gather the data related to your production for a given period.
    • You will need inventory statistics like total output. You will also need the fixed costs, variable costs and total costs for a given quantity production (output).

Chart Production

  1. Chart the total cost and output on a spreadsheet. Consider the following columns in your spreadsheet:
    • Use the header "Output" in your first column. You can fill the rows with single unit increases in output or larger jumps. For instance, it may be numbered 1,2,3, etc. or it can be numbered in larger increments, such as 1000, 2000, 3000, etc.
    • Consider whether you want to simply add "Total Cost" or add 3 columns for "Fixed Cost," "Variable Cost" and "Total Cost." If you do not want to include the numbers for fixed and variable cost, make sure both these figures are calculated in the total cost.
    • Type the correct "Total Cost" figures for each rise in output. You will be able to figure out marginal cost for each increase in output based on these figures.
  2. Save your spreadsheet frequently while entering data.

Calculate Marginal Cost

  1. Add a column next to Total Cost labeled "Marginal Cost." You will figure out the marginal cost for each level of output separately.
    • Keep in mind that marginal cost is based on the changes in cost as you produce more. The figures will plot change in output and cost throughout your chart.
  2. Write down the formula. To calculate marginal cost, you will need to take the change in total cost divided by the change in total output.
  3. Take the first 2 rows of your chart. Subtract the total cost of the first row (after headings) by the total cost of the second row. This is your change in total cost.
  4. Subtract the total output of the first row by the total output of the second row. This is your change in total output.
  5. Enter the data into your formula.
    • For example, if your first row of data shows total output of 1,000 for a cost of $8,000 and the second row of data shows a total output of 2,000 for a cost of $12,000, your formula would be marginal cost=$12,000-$8,000)/(2,000-1,000).
  6. Simplify to solve the problem.
    • In our example, we simplify to get marginal cost=$4,000/1,000 or marginal cost=$4.

Chart Marginal Cost

  1. Enter your marginal cost into the row next to your second set of data. The first row of data will not have a marginal cost, because marginal cost cannot be calculated based on an output of zero.
  2. Continue to calculate the marginal cost between each row of data and the set above it.
    • If you are using Microsoft Excel, you can include a formula to automatically calculate the data. Enter an equals sign in the blank box under your marginal cost column, then replace the data numbers with cell numbers. For example, "=(F4-F3)/(G4-G3)." Then click "Enter." Drag the formula down the column to reproduce it in each row.



Tips

  • You may want to highlight your data and graph it in your spreadsheet program. Marginal cost is frequently featured in graphed format, because you can see a line that represents the changes in cost as production rises.

Things You'll Need

  • Spreadsheet program
  • Total output
  • Total Cost (Fixed Cost+Variable Cost)
  • Calculator
  • Marginal cost formula

Sources and Citations

Retrieved from "https://kipkis.com/index.php?title=Calculate_Marginal_Cost&oldid=351303"