# How do I calculate marginal cost?

I want to know if I did the calculations for the terms mentioned in the question correctly.

I am trying to see how much the organization saves in costs if the organization does mass production.

I am really awful at Maths. I am supposed to analyze a business, suggest a strategy, but as part of the analysis, I am supposed to look at discounted cash flow which I have done and now I decided to look at marginal cost with mass production.

To explain what I have done for the marginal cost. I did a change in unit produced/change in total cost.

So for sell I3 I did =($$E3-$$E4)/($$A3-$$A4). Then I did the same for each sell going down? Is that right? This looks like (£28,872-26.760)/(200-100) = £21 but on excel it equals £17,60 I don't know what I am doing wrong

I need this for an assignment due in 5 days

Thanks

Your definition is correct. Think of marginal cost as the cost of producing the next good. Let $$C$$ represent total cost and $$Q$$ quantity. Then, we define marginal cost ($$MC$$) as:

$$MC = \frac{\Delta C}{\Delta Q} .$$

In your spreadsheet, at $$Q = 100$$,

$$\Delta C = \text{E}4 - \text{E}3 ,$$

$$\Delta Q = \text{A}4 - \text{A}3 .$$

So, at $$Q = 100$$,

$$MC = \frac{\text{E}4-\text{E}3}{\text{A}4-\text{A}3} .$$

Note, because of the identity $$C = FC + VC$$, where $$FC$$ is fixed cost and $$VC$$ is variable cost, you also have the following:

$$MC = \frac{\Delta C}{\Delta Q}$$

$$= \frac{\Delta (FC + VC)}{\Delta Q}$$

$$= \frac{\Delta FC + \Delta VC}{\Delta Q} .$$

Because fixed costs are fixed for all quantities, $$\Delta FC = 0$$ is always true, so we can further simplify to

$$MC = \frac{\Delta VC}{\Delta Q}$$

So, instead of using column E in your spreadsheet, you could also have used column C. You'd end up with the same answer for marginal cost.

One more note: there shouldn't be a value in cell I12, since you don't have any data on the cost of producing an additional good at a quantity of 1000. I'm also not sure where you see a value of 28,872 - in the spreadsheet, it looks like the value in cell E4 is 28,520, so the calculation in Excel is correct.

• Okay, thank you, ye I could have used cell C would have been easier. I think for some reason I was under the impression of needing to show my working out, step by step, then again, I am doing business, so I wouldn't need to. Since this is slightly out of the scope of the assignment. Am I right to make an assumption of variable costs and fixed costs. The cost of clothing per unit is actually the average cost of producing a premium outfit in the UK According to some websites. Also, it seems that producing 100 - 900 yields no benefit for mass production. They values aren't smaller. – Sali Warrior Jan 14 at 13:12
• The fixed cost was totally assumed. I assumed based on the rent of the building and machinery for producing the units.That it would amount to £25,000 – Sali Warrior Jan 14 at 13:17
• Actually, I just realised something I've been watching a video where someone had his variables change incrementally without knowing the reason. \I must have skipped the reason. here is the video youtube.com/watch?v=7t8gdc3YogM – Sali Warrior Jan 14 at 16:50
• The marginal cost values aren't any smaller, but the average cost does decrease - your average fixed cost decreases with each additional unit, so it might be worthwhile to expand. It also depends on what demand looks like, but if you're assuming elastic demand (you will always have somebody willing to buy), and that the price is higher than the marginal cost, then you always would be willing to produce more (you earn a profit for each additional unit produced). – Amaan M Jan 14 at 23:31