Page 369 - Foundations of Marketing

336 Part 4 | Product and Price Decisions

Marginal Analysis

Marginal analysis examines what happens to a firm’s costs and revenues when production
fixed costs Costs that do
not vary with changes in the (or sales volume) changes by one unit. Both production costs and revenues must be evalu-
number of units produced or ated. To determine the costs of production, it is necessary to identify several types of potential
sold costs. Fixed costs do not vary with changes in the number of units produced or sold. For
example, a manufacturer’s rent for a factory does not change because production increases,
average fixed cost The fixed
cost per unit produced more employees are hired, or sales go up. Rent may increase, but it is not in relation to produc-
tion or revenue. Average fi xed cost is the fixed cost per unit produced and is calculated by
variable costs Costs that vary
directly with changes in the dividing fixed costs by the number of units produced.
number of units produced or Variable costs are directly related to changes in the number of units produced or sold. The
sold wages for adding a second shift of workers and the cost of inputs to produce twice as much
average variable cost The product are variable costs because they increase as production increases. Variable costs are
variable cost per unit produced usually held constant per unit. That is, as long as there are no increases in effi ciency, twice
total cost The sum of average as many workers and twice as many raw materials result in double the production. Average
fixed and average variable costs variable cost , the variable cost per unit produced, is calculated by dividing the variable costs
times the quantity produced by the number of units produced.
average total cost The sum of Total cost is the sum of the average fi xed costs and the average variable costs, multiplied
the average fixed cost and the by the quantity produced. The average total cost is the sum of the average fi xed cost and the
average variable cost average variable cost. Marginal cost (MC) is the extra cost a fi rm incurs when it produces one
marginal cost (MC) The extra additional unit of a product.
cost incurred by producing one Table 12.1 illustrates an example of the relationships between various costs. Notice that
more unit of a product average fi xed cost declines as output increases. This is because a manufacturer generally gains

Table 12.1 Costs and Their Relationships

3 5
Average 4 Average 6
2 Fixed Average Total Total 7
1 Fixed Cost Variable Cost Cost Marginal
Quantity Cost ( 2 ) ÷ ( 1 ) Cost ( 3 ) + ( 4 ) ( 5 ) × ( 1 ) Cost
1 $ 40 $ 40.00 $ 20.00 $ 60.00 $ 50

$ 10
2 40 20.00 15.00 35.00 70

2

3 40 13.33 10.67 24.00 72
18

4 40 10.00 12.50 22.50 90

20
5 40 8.00 14.00 22.00 110

30

6 40 6.67 16.67 23.33 140

40
7 40 5.71 20.00 25.71 180
From Pride/ Ferrell , Marketing 2014, 17E. 2014 Cengage Learning.

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