Financial Terms Glossary

Marginal Cost

Formal

The extra/additional cost of producing or manufacturing an item, rather than the full cost of manufacture. Eg, - a production line is built to manufacture 1000 cars. Total cost $1,000,000, therefore cost per car is $1,000. However, if extending the run by another 100 cars, the extra cost of this is only another $10,000. This means that the marginal cost of the extra 100 cars is $10,000 divided by 100 = $100 per car, NOT the original $1,000 total cost per car.

Informal

The ultimate in dull party conversation - and something your Finance community are sure you cannot get your head around. Well, here goes party pooper! The cost of producing 1000 widgets is $1 each, but the cost of making just one more is only 10 cents - that's because all the other costs are already absorbed in the first production run. So, if you need a really keen price from your manufacturer - ask him to price it on a marginal cost basis and see how quickly you are shown the door.

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