Importance of Marginal Costing

Importance of Marginal Costing

1. The concept of marginal cost is important for individuals producing or consuming multiple units.

2. The concept of marginal cost is very important in areas of economics such as analyzing optimum levels of production for a firm. Profit maximizing output is achieved when marginal cost equals marginal revenue.

3. Marginal cost is also important for consumers looking to purchase additional units of a good or service. Stores will often take advantage of this in offering deals and sales, such as buy one, get one half priced or buy one, get one free (BOGO). Not only does this encourage shoppers to purchase multiple units, but it likely generates income for the company as well. Consumers are much more likely to buy a second item at half-price because the marginal cost is half of the original cost.