Incremental cost

Written by Fmi.Online Friday January 6, 2023
An incremental cost or differential cost is a business planning analysis that looks at the additional cost to the company if a particular action is taken. In other words, if a company decides to take action on a new project, what extra expenses will the new project create?

Explanation :

Manufacturers look at incremental costs when deciding to produce another product. Oftentimes new products can use the same assembly lines and raw materials as currently produced products. Unfortunately, most of the time when manufacturers take on new product lines there are additional costs to manufacture these products. Management must look at these incremental costs and compare them to the additional revenue before it decides to start producing the new product.

In a nutshell :

 
  • Incremental cost is the amount of money it would cost a company to make an additional unit of product.
  • Companies can use incremental cost analysis to help determine the profitability of their business segments.
  • A company can lose money if incremental cost exceeds incremental revenue.
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