Within the definitions of finance and economics, there is a definition that bears a lot of connection with the production of goods; This term of marginal cost itself encompasses several definitions that, intertwined, make it possible to reach the final definition, in which a marginal cost is the rate of change that exists given the change in production.
In slightly simpler terms, you can set the marginal cost as the increase that exists in the cost of production of a unit, when the general production increases. In simpler terms, marginal cost answers the question How much does it cost me to make 1 more unit? But in order to understand the meaning of this term in a more extensive way, it is essential that we answer other questions, we begin by analyzing what a cost is.
Marginal cost
When we refer to the production of some good, we always speak of the need for the joint participation of several items, whose interaction makes possible the the raw material becomes the final product, that is destined to fall into the hands of the end customer.
But what is needed to carry out this procedure?
Take, as an example, the procedure of assembling a simple chair, which needs boards, tubes and screws. The assembly procedure is simple, since it is enough that the tubes are screwed with the boards to be able to have the complete chair, this means that in order to assemble a chair it is necessary to buy the raw material with which it was manufactured, that is, , boards, tubes and screws; It is therefore that we now know that there is a cost of raw material. Now, let's think about what this entails in terms of other types of investments.
To assemble a chair, not only the raw material is needed, but also one of the most important items, a person. This person who is known as the worker or the operator is the one who is in charge of being able to carry out the assembly procedure, thanks to which we can get the chair assembled as a final consequence; And something very important is that, to the investment in raw materials, we now add the investment in labor, since the salary that is granted in order to obtain the human capital to carry out the procedure, is also considered as a production cost, but it doesn't end here.
So that the worker can turn the tubes and boards into a beautiful chair, machinery is needed to be able to assemble the product, this machinery can be, for example, drills and bases to support the assembly, like this investment in production it is added the cost of the machinery. And, now, for the machinery to function properly it is necessary to have electrical or hydraulic outlets, to be able to operate the machines, which means that, for each assembled unit, one will also have to be loaded. Investment in energy.
Each of those investments that are made to achieve the objective of producing a certain product are known as product production cost. But there are not only the aforementioned costs, there are also logistics or transportation costs, management costs, tax costs, maintenance costs, among some others.
Investments
In recent years it has become fashionable the term investment, and even though on many occasions we believe that an investment is when stocks or some other financial product are bought and sold, an investment is not always of that type; In the manufacturing industry, the investment procedure is carried out when certain capital is made available to be able to produce a good. In these cases, the return on the investment that is made can vary in many aspects, however, it is the same end that is pursued.
In manufacturing investments, we can find a possibility to sale of a certain product that it became popular or is in high demand; Continuing with the example of the manufacture of chairs, it is feasible that we find that one of the areas with the largest number of clients is the sale of chairs; Once this area of possibility has been identified, it is time to start talking about a project.
This project refers to the planning of the entire procedure that is needed to achieve the final objective, which is to market a certain number of chairs, with which the desired earnings. It is during this planning that all expenses that will be incurred to achieve the end goal are identified. These expenses are the investment to be made.
Among the points that are considered capable of establishing the final amount of the investmentWe have the investment in infrastructure, and it is that to manufacture our chairs we will need a space dedicated to storing the raw material that they provide us; after that, an area is needed to be able to assemble the chairs; and later a space is needed to store the chairs already assembled. Apart from this, a space is needed for the management offices and the vehicles through which the production will be sent to the customers.
Another type of investment that is made in this project are the permits that are required to be able to operate correctly; Along with this, it is important to consider the investment in maintenance equipment, which will be used to keep the entire system and all the machines and tools used in the company running.
Now, as soon as it has the total amount to invest, it is expected to achieve the goal, and the main objective of a company is to generate profits, that is why the profits from sales have to exceed the investments made. . From this dynamic we can think of the following.
Once the analysis is done, neustra chair factory a total investment of 1 million euros is required; and the project plans to manufacture 100,000 chairs a year for the next 5 years; If we want to make a profit from this production, it is necessary for the chairs to be sold at a price that covers the investment made at the beginning, and at the time of maintaining production, and in turn, that covers the appropriate profit margin.
In our example, the planning indicates that a total of 500,000 chairs will be made, for which an amount of 1 million euros was initially invested, plus the monthly investments in terms of salaries and raw materials, which are equivalent to 10,000 euros per month. So the final investment is 1,600,000 euros. And if our desire is to win a 15% in terms of our investment, the profit would amount to 240,000 euros, which added to our investment gives us a total of 1,840,000 euros as the final amount to be earned from the sale of the chairs. So, according to our production planning, each chair should sell for 3.68 euros.
Marginal cost
When we carry out a project, the most natural thing is to have a production and sales projection, In spite of everything, there are times when the demand for the good exceeds the project's projections, so in order to have a response time margin, the projects make assumptions about a viable increase in sales, so on some occasions extra costs are included to support the extra production, it is in these cases that the marginal cost is applied in the best way, that is: if instead of 500,000 units I want to produce 500,001 units, how much more, at the same time of the 1,840 .000 euros, will I have to invest to achieve the desired production?
It is very important to know this information in order to know the final price of these units, with which we can precisely establish the sale price, so that the project objectives are achieved and maintained. But how do we know the marginal cost?
Mathematically the marginal cost It is represented as the derivative of the total cost, between the derivative of the number of total units; This implies that the total cost invested to achieve the determined number of units must be divided by the number of actual parts, so that it can be established as a unit cost.
This marginal cost is very useful when carrying out projects because from the financial point of view, the optimal point is between the cost of production and the selling price, so the appropriate price is calculated at which the company does not lose money, but don't abuse the customer. Undoubtedly, taking this deadline into account when planning our projects will help us to have a better financial result.
