Incremental cost
An increase in cost between two alternatives.
Incremental cost refers to the change in cost that results from a particular action or decision. It is the difference between the cost of two alternative courses of action, or the additional cost incurred when moving from one level of output to the next. Incremental costs are also called marginal costs because they represent the cost of producing one extra unit of output.
For example, suppose a company is considering whether to produce 1000 or 1500 units of a product. The incremental cost of producing the additional 500 units can be calculated by subtracting the cost of producing 1000 units from the cost of producing 1500 units. This difference represents the incremental cost of producing the additional units.
Incremental cost is important because it helps businesses make decisions about whether to pursue a particular course of action. By understanding the incremental cost of a particular decision, businesses can make informed decisions about how to allocate resources and optimize production. Increments costs can also help businesses identify inefficiencies in their production processes and make adjustments to minimize costs.
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