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marginal, or incremental, cost

The change in costs that occurs when there is a small change in output.

By plotting these points in Figure 11.3, we see that the relationship between quantity produced and total costs is given by a straight line. In Figure 11.3, notice that total costs are equal to fixed costs when sales are zero. Beyond that point, every one-unit increase in production leads to a $3 increase in total costs, so the slope of the line is 3. In other words, the marginal, or incremental, cost of producing one more unit is $3.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

IV. Capital Budgeting

11. Project Analysis and Evaluation

© The McGraw-Hill Companies, 2002

CHAPTER 11 Project Analysis and Evaluation

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Output Level and Total Costs

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