Formula of Marginal Cost (Table of Contents)
What is Marginal Cost Formula?
Marginal cost formula is the change in the total cost of production upon a change in output that is the change in the quantity of production.
In short, the marginal cost formula is the change in total cost that arises when the quantity produced changes by one unit. Mathematically, the calculation of marginal cost equation is expressed as a derivative of the total cost with respect to quantity.
Let us see the equation of Marginal Cost: –
- Change in Total Cost = Total Cost of Production including additional unit – Total Cost of Production of normal unit
- Change in Quantity = Total quantity product including additional unit – Total quantity product of normal unit
Explanation of Marginal Cost Formula
Marginal Cost Equation can be derived in the following steps:
Step 1: Consider the total output, fixed cost, variable cost and total cost as input.
Step 2: Prepare a production graph considering a different quantity of output.
Step 3: Find the change in cost i.e. difference of total cost of production including additional unit and total cost of production of the normal unit.
Step 4: Find the change in quantity i.e. total quantity product including additional unit and total quantity product of normal unit.
Step 5: Now, as per the equation of Marginal cost divide change in cost by a change in quantity and we will get marginal cost.
Relation Between Marginal Cost and Marginal Revenue
Let’s see a relation between marginal cost and marginal revenue.
- If MR > MC then a company should increase output for more profits
- If MR < MC then company should decrease output for additional profit
- Under perfect competition, if company objective is maximizing profit then MR=MC
Example of Marginal Cost Formula
Now, let us see an example of Marginal cost equation.
A manufacturing company has a current cost of production of 1000 pens is $1,00,000 and its future output expectation is 2000 pens with future cost of production $1,25,000. So the calculation of the marginal cost formula will be 25.
- Change in Total cost = $1,25,000 – $1,00,000 = $25,000
- Change in Quantity = 2000 – 1000 = 1000
- Marginal Cost Equation = 25000/1000
- Marginal Cost = 25
- So the Marginal cost for the above example of manufacturing company will be 25.
Marginal Cost Formula in Excel (with excel template)
Now let us take the case mentioned in above Marginal cost formula example to illustrate the same example of marginal cost formula in excel template below.
In below template is the data of manufacturing company for the calculation of Marginal Cost Formula.
In the below given excel template, we have used the calculation of Marginal Cost Equation to find the marginal cost.
So the Calculation of Marginal Cost Will Be-
You can download this Marginal Cost Formula in Excel template here – Marginal Cost Formula Excel Template
Marginal Cost Calculator
You can use the following Marginal Cost Calculator.
|Marginal Cost Formula =||
Use of Marginal Cost Formula
Uses of Marginal Cost equation are as follows:-
- Marginal cost used in financial modeling to optimize the generation of cash flow.
- Marginal cost used to calculate the incremental cost of production.
- Marginal cost helps to take production decision.
Marginal cost formula at each level of production includes additional cost required to produce the unit of product. Practically, analyses are segregated into short-term, long-term, and longest term. At each level of production and time period being considered, marginal costs include all costs which vary with the level of production and other costs are considered fixed costs whereas practically there in inflation which effects cost in long run and may increase in future.
There are a number of factors which affects marginal cost and its application. Some of them are considered a market failure. It also includes information asymmetries the presence of externalities, transaction costs etc.
Marginal cost can be said as an extra expense on producing one additional unit. It helps management to make the best decision for the company and utilize its resources in a better and profitable way as with quantity profit increase if the price is greater than marginal cost.
This has been a guide to Marginal Cost Formula. Here we discuss the Marginal Cost Equation, its uses along with practical examples and Marginal Cost Calculator. You can learn more about Accounting from the following articles –