Marginal cost

Published Thursday 23 July 2026

Table of contents

• What is marginal cost?
• Marginal cost formula
• Fixed costs versus variable costs
• Why marginal cost matters
• Marginal cost in action
• Marginal cost versus marginal revenue
• Marginal costs versus stepped costs
• Work out your costs with Xero
• FAQs on marginal cost
• Related terms
• Learn more about marginal cost

Key takeaways

• Marginal cost is the cost of producing one more unit of a product or service.
• You work it out by dividing the change in total cost by the change in quantity.
• Only variable costs move your marginal cost, because fixed costs stay the same as output rises.
• Knowing your marginal cost helps you set prices and decide how much to produce.

What is marginal cost?

Marginal cost is the cost of producing one more unit of what you sell. In manufacturing, it's often called the marginal cost of production.

It tells you how much extra you spend to make one more product, or to deliver a service one more time.

Marginal cost formula

You can work out marginal cost with a simple formula that compares your extra costs to your extra output. For the full worked example, see how to calculate marginal cost.

marginal cost = change in total cost / change in quantity

You can also write this as MC = change in total cost ÷ change in quantity. Here's what each term means:

• Change in total cost: how much your total costs go up when you make more units
• Change in quantity: the number of extra units you produce

Fixed costs versus variable costs

Your costs split into two types, and only one of them affects your marginal cost. Understanding the difference between fixed costs and variable costs shows you why.

Variable costs, like raw materials, rise as you produce more, so they change your marginal cost. Fixed costs, like rent, stay the same whether you make one unit or a thousand, so they don't move it.

Why marginal cost matters

Knowing what it costs to make more of what you sell helps you price and plan with confidence. The incremental cost is often small, because you've already paid for the tools and systems needed to make the product or deliver the service.

When your marginal cost is low, you can affordably increase production. That gives you room to grow sales, sharpen your pricing, and protect your profit margin.

Marginal cost in action

Marginal cost shows up whenever you serve one more customer. The cost of doing so is often relatively low, which works in your favour.

That low incremental cost gives you a choice. You can make the extra sale at a higher profit, or pass the saving on and offer your customers a better price.

Marginal cost versus marginal revenue

Marginal cost is only half the picture, so it helps to weigh it against marginal revenue. Marginal revenue is the extra revenue you earn from selling one more unit.

Producing more makes sense while your marginal revenue is at or above your marginal cost. The point where the two meet is your break-even point, beyond which extra sales start eating into profit.

Marginal costs versus stepped costs

You can often produce more by simply buying more raw materials, but this doesn't last forever. At some point your capacity maxes out and marginal cost gives way to a bigger jump in spending.

To keep growing, you might invest in a new workshop, more equipment, or extra staff. These bigger investments are stepped costs, and you'll usually need to sell a lot more to pay them back.

Work out your costs with Xero

Accounting software helps you track your costs and margins in one place, so you can see how each extra sale affects your bottom line. Xero brings your numbers together to support clear pricing and production decisions, and you can get one month free when you sign up to a pricing plan.

FAQs on marginal cost

Here are answers to some frequently asked questions about marginal cost.

How do you calculate marginal cost?

Divide the change in your total cost by the change in the quantity you produce. So if making 10 more units adds $50 to your costs, your marginal cost is $5 per unit.

What is the difference between fixed costs and variable costs?

Fixed costs, such as rent, stay the same no matter how much you produce. Variable costs, such as materials, rise and fall with your output.

Why is marginal cost important?

It shows you the true cost of making one more unit, which helps you set prices. It also tells you when producing more will add to your profit rather than eat into it.

What is the difference between marginal cost and marginal revenue?

Marginal cost is the extra cost of producing one more unit, while marginal revenue is the extra income from selling it. Comparing the two shows you whether making more is worthwhile.

Related terms

• Marginal cost (calculation)
• Direct costs
• Fixed cost
• Variable cost
• Break-even point

Learn more about marginal cost

• How to calculate marginal cost
• Cost of goods sold
• Profit margin
• Measuring profitability
• Business cost-saving ideas