Marginal Costs

Definition: The change in costs of making additional items.

Example: The marginal costs of only producing one more unit may just be the material costs of each unit. The marginal costs of producing 1,000 more units may be the additional material costs, as well as extra labor or equipment costs that you actually had to pay more money for because you increased production.

Why It’s Important: Knowing your marginal costs helps you decide how to set pricing and whether potential new deals will be profitable.

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