Explain incremental revenues and incremental costs. Provide a business example for each of these terms.

Explain incremental revenues and incremental costs. Provide a business example for each of these terms.

Expert Solution

Incremental revenue means earn additional revenue from producing additional quantity. In simple terms incremental revenue means the increased revenue from a specified increase in sales. It can also be used to the additional return from one investment decision compared with another.example of Incremental revenue is the additional revenues from the next 200 units.

A Company sells $20,000 worth of trainers per month without running any advertising campaigns. Throughout March the company spends $5,000 on a Amazon campaign and sells $32,000 worth of trainers in total.

Incremental revenue = $32,000 — $20,000

Incremental revenue = $12,000

Incremental cost refers to the the cost added by producing one additional unit of a product or service. it refered as total change of company's balance sheet and income statement due to production or sale of additional unit of product. Incremental cost also known as differential cost. Incremental costs may include more than the change in variable costs.

Incremental costs are also useful for deciding whether to manufacture a good or purchase it from elsewhere. Only the additional costs associated with the manufacturing of the good should be considered and compared to the retail price.

Example

If a company responds to greater demand for its unit by increasing production from 90,000 units to 1,00,000 units, it will incur additional costs to make the extra 10,000 unit. If the total production cost for 90,000 widgets was $4,50,000, and the total cost after adding the additional 10,000 units increased to $5,00,000, the cost for the additional 10,000 units is $50,000. The incremental cost, or cost of adding one unit, would be $5.

2nd example :-

Suppose now after adding the new product line it is able to produce 200 units at ₹ 3500, so here the incremental cost is ₹ 1,500

Per unit cost of manufacturing the products has actually decreased from ₹ 20 to ₹ 17.5 by introducing the new product line.

ekkarill92 answered 3 months ago

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