Lec. 9

• An incremental cost-effectiveness ratio is a summary measure representing the economic value of an intervention, compared with an alternative (comparator).
• Incremental cost is calculated by analyzing the additional expenses involved in the production process, such as raw materials, for one additional unit of production.
• Incremental costs are usually lower than a unit average cost to produce incremental costs.
• Incremental costs are always comprised of variable costs, which are the costs that fluctuate with production volumes.
• If incremental cost leads to an increase in product cost per unit, a company may choose to raise product price to maintain its return on investment (ROI) and to increase profit.
• Examples of incremental costs include raw materials such as inventory, utilities, wages or direct labor that's only involved in production, and shipping and packaging.
• Understanding incremental costs can help a company improve its efficiency and save money.
• Understanding the additional costs of increasing production of a good is helpful when determining the retail price of the product.
• Incremental cost = New production cost – current production cost.
• Suppose a company is currently producing 1,000 units of a product at a total cost of $50,000.
• If the company decides to increase production to 1,200 units, incurring an additional cost of $10,000, what is the incremental cost?
• Current production cost for 1,000 units: $50,000
• New production cost for 1,200 units: $50,000 + $10,000 = $60,000
• Incremental profit = Annual profit from a project.
• Consider a company deciding whether to undertake a new project.
• The initial investment is $100,000, and the project is expected to generate an additional annual profit of $30,000.
• The incremental profit is the additional profit generated by the project beyond the original state.
• In this case, it's the annual profit from the project.
• Incremental cost/savings = In-house cost – Outsourcing cost.
• A company is currently performing a specific task in-house at a cost of $20,000 per month.
• They are considering outsourcing the task at a cost of $15,000 per month.
• The incremental cost or savings is the difference in cost between the two alternatives.