Incremental Cost

Incremental cost focuses on the change in total costs caused by a particular choice. It compares total costs with the decision and without it.

For example, a factory currently producing 10,000 units has total costs of 120,000. If producing 11,000 units would raise total costs to 124,000, the incremental cost of the extra 1,000 units is 4,000, or 4 per unit. If a customer offers to buy those 1,000 units for 6 each, the order adds 2,000 of profit.

Incremental costs often include extra materials, labour and energy, and sometimes additional fixed costs if the decision requires more space or equipment. Costs that would be incurred anyway are excluded.

Incremental cost is closely related to marginal cost. Marginal cost usually refers to the cost of one additional unit, while incremental cost can refer to the cost of any additional batch, project or decision.

Comparing incremental costs with incremental revenues is a core part of business decision-making, used for pricing special orders, deciding whether to expand production and choosing between projects.