when a manufacturer wishes to expand its operations either by adding new product lines or increasing the volume of goods produced from the current product line a marginal analysis of the costs and benefits is necessary some of the costs to be examined include but are not limited to the cost of additional manufacturing equipment any additional employees needed to support an increase in output large facilities for manufacturing or storage of completed products and as the cost of additional raw materials to produce the goods 
once all of the costs are identified and estimated these amounts are compared to the estimated increase in sales attributed to the additional production this analysis takes the estimated increase in income and subtracts the estimated increase in costs if the increase in income outweighs the increase in cost the expansion may be a wise investment for example consider a hat manufacturer each hat produced requires seventy five cents of plastic and fabric your hat factory incurs 100 dollars of fixed costs per month if you make 50 hats per month then each hat incurs 2 of fixed costs in this simple example the total cost per hat including the plastic and fabric would be 2 75 2 75 0 75 100 50 but if you cranked up production volume and produced 100 hats per month then each hat would incur 1 dollar of fixed costs because fixed costs are spread out across units of output the total cost per hat would then drop to 1 75 1 75 0 75 100 100 in this situation increasing production volume causes marginal costs to go down 