when a company knows both its marginal cost and marginal revenue for various product lines it can concentrate resources on items where the difference is the greatest instead of investing in minimally successful goods it can focus on making individual units that maximize returns 
marginal cost is also essential in knowing when it is no longer profitable to manufacture additional goods when marginal cost exceeds marginal revenue it is no longer financially profitable for a company to make that additional unit as the cost for that single quantity exceeds the revenue it will collect from it using this information a company can decide whether it is worth investing in additional capital assets marginal cost is also beneficial in helping a company take on additional or custom orders consider a company that sells a good for 50 it has additional capacity to manufacture more goods and is approached with an offer to buy 1 000 units for 40 each marginal cost is one component needed in analyzing whether it makes sense for the company to accept this order at a special price example of how to use marginal costproduction costs consist of both fixed costs and variable costs fixed costs do not change with an increase or decrease in production levels so the same value can be spread out over more units of output with increased production variable costs refer to costs that change with varying levels of output therefore variable costs will increase when more units are produced for example consider a company that makes hats each hat produced requires 0 75 of plastic and fabric plastic and fabric are variable costs the hat factory also incurs 1 000 of fixed costs per month if the company makes 500 hats per month then each hat incurs 2 of fixed costs 1 000 total fixed costs 500 hats in this simple example the total cost per hat would be 2 75 2 fixed cost per unit 0 75 variable costs if the company boosted production volume and produced 1 000 hats per month then each hat would incur 1 of fixed costs 1 000 total fixed costs 1 000 hats because fixed costs are spread out over an increased number of units of output the total cost per hat would then drop to 1 75 1 fixed cost per unit 0 75 variable costs in this situation increasing production volume causes marginal costs to go down if the hat factory was unable to handle any more units of production on the current machinery then the cost of adding a machine would need to be included in the marginal cost assume the machinery could only handle 1 499 units the 1 500th unit would require purchasing an additional 500 machine in this case the cost of the new machine would need to be considered in the marginal cost of production calculation as well marginal cost also has an impact on average cost when the marginal cost is less than the average cost the production of additional units will decrease the average cost when the marginal cost is higher producing more units will increase the average cost per unit special considerationsmarginal cost is often graphically depicted as a relationship between marginal revenue and average cost the marginal cost slope will vary across company and product but it is often a u shaped curve that initially decreases as efficiency is realized only to later potentially exponentially increase marginal cost is strictly an internal reporting calculation that is not required for external financial reporting public facing financial statements are not required to disclose marginal cost figures and the calculations are simply used by internal management to devise strategies in many ways a company may be at a disadvantage by disclosing its marginal cost competitors would gain the advantage of knowing the company s cost structure and the market could attempt to apply pressure to a company knowing the specific manufacturing levels where operations become unprofitable for other companies marginal cost highlights the premise that one incremental unit will be much less expensive if it remains within the current relevant range however additional step costs or burdens to the existing relevant range will result in materially higher marginal costs that management must be aware of consider the warehouse for a manufacturer of landscaping equipment the warehouse has the capacity to store 100 extra large riding lawn mowers the margin cost to manufacture the 98th 99th or 100th riding lawn mower may not vary too widely however manufacturing the 101st riding lawn mower means the company has exceeded the relevant range of its existing storage capabilities that 101st riding lawn mower will require an investment in new storage space a marginal cost not incurred by any of the other recently manufactured goods marginal cost figures significantly into the marginal cost pricing doctrine aka marginal cost theory an economic principle that dictates that prices for products or rates for services should be predicated upon marginal costs for the purpose of economic efficiency the doctrine stems from political economist and professor alfred e kahn s seminal work the economics of regulation 1 under pure competition the price will be set at marginal cost the marginal price will equal the marginal cost kahn wrote and this results in the use of society s limited resources in such a way as to maximize consumer satisfaction 1