For example, if you own a cupcake bakery, your ovens are a fixed expense. If your ovens are capable of baking 1,000 cupcakes a day, then 1,000 would be the maximum quantity of cupcakes you would consider for your marginal cost analysis. If you produced more than 1,000 cupcakes, your fixed costs would change because you would have to buy an additional oven.
For example, suppose you run a spa that gives between 3 and 5 massages a day. You want to know the marginal cost of scheduling one additional massage. In this case, it makes sense for your interval to be one. If you produce products, you may want to look at larger changes in quantity. For example, if your company produces 500 widgets a day, you might want to consider the marginal cost of producing 100 more, then 200 more, and so on.
For example, if your company produces 500 widgets a day and you want to look at the marginal cost of producing 600 widgets a day, your change in quantity would be 100.
Capital expenditures such as equipment would typically be fixed costs. The amount you pay each month to lease your business space would also be a fixed cost. Variable costs include your utilities, employee payroll, and the supplies that are used to produce your product or service. These costs are variable because they generally will increase as your production level increases. Calculate variable costs for each output level or production interval. Add the variable costs to the fixed costs to get your total costs.
For example, if your total cost to produce 500 widgets is $500, your average total cost per unit is $1. But if your total cost to produce 600 widgets is $550, your average total cost per unit at that quantity is $0. 92. You can also calculate the average fixed cost and the average variable cost.
For example, if it costs you $500 to produce 500 widgets and $550 to produce 600 widgets, your change in cost would be $50.
For example, suppose you want to calculate the marginal cost of producing 600 widgets a day, up from 500 widgets a day. Your change in cost is $50 and your change in quantity is 100. Therefore your marginal cost is $0. 50.
For example, suppose your marginal cost of producing 600 widgets instead of 500 widgets is $. 50. However, your marginal cost of producing an additional 100 widgets (700 widgets) is only $0. 32. Producing 700 widgets would be more cost-effective than producing 500 widgets. Your marginal cost doesn’t always decrease. Eventually, it will increase. For example, if you have to hire another team member to produce 800 widgets, that might increase your marginal cost to $0. 52.
Plotting your data on a curve allows you to determine what production level would be most cost-effective for your business.
