Marginal Cost is the effect on total cost, whether an increase or a decrease, of producing
one more or one less unit. Also known as differential cost or incremental cost.
If a printing company has an order for 100,000 copies of a full-color brochure, the cost-
including paper, labor, press time, and an allowance for fixed costs like rent and
insurance-is $150,000, or $1.50 per copy.
Since the fixed costs are already covered, and a lot of the other costs are in preparing for
the press run, printing another 10,000 copies will add only $5,000 to the printer's total
cost. The marginal cost for the extra copies is 50 cents a copy ($5,000 ÷ 10,000 copies).
Marginal cost is the lowest advisable sales price for a product or service. The printing
company knows it must charge at least 50 cents a copy for the additional production.
On a broader basis, a firm's average variable cost (AVC) is the critical "breakpoint" in
deciding whether to continue production. For example, if our printing company has a
marginal cost of $0.50 but an AVC of $0.60, then it should discontinue production for
any sales price less than $0.60, even though the marginal cost is lower.