How this calculator works
Marginal cost measures the extra cost of producing one more unit. It is calculated from a change in total cost divided by the change in output, which makes it a slope rather than an average. When a business has spare capacity, marginal cost is often low; as it approaches full capacity, overtime, extra shifts and less efficient equipment push it up. Profit is maximised where marginal cost equals marginal revenue, so a firm that knows both can identify its best output. Marginal cost is also the relevant cost for decisions such as whether to accept a one-off extra order at a lower price.
Formula
Marginal cost = change in total cost / change in output. Change in total cost = marginal cost × change in output. Change in output = change in total cost / marginal cost.
Worked example
Producing 100 more units raises total cost by $5,000, so marginal cost is $50 per unit. If the extra 100 units can be sold for $60 each, each one adds $10 of profit before any fixed cost change.
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Frequently asked questions
How is marginal cost different from average cost?
Average cost divides total cost by total output, spreading fixed costs across every unit. Marginal cost looks only at the next unit and ignores fixed costs that do not change. The two cross where average cost is at its minimum.
Why does marginal cost rise eventually?
The law of diminishing returns: as more variable inputs are added to a fixed input such as a factory, each additional unit of output needs more input than the one before. That raises the cost of the next unit.
Can marginal cost be negative?
It can be zero or even negative in a narrow range if producing more reduces a cost, for example when a by-product avoids disposal fees. For most businesses it is positive, and this calculator allows a negative cost change but not a zero output change.