Transcript Of Incremental And Differential Cost

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Anyway so I would like to introduce you to the problem. These are going to be used for the inverse body decision and, I lost the last line, the optimal cases issue. Incremental cost, the first, go both graphically over here and symbolically over here.

Here is a total cost function, what you are looking at for incremental cost is your choosing some known level of output, we will call it Q0. And you are trying to increase output or change it to some other level. And so what you have here is Q0 + X. X is the change in output that is there and you are reading off what those two costs are. And so here is the total cost that is associated with Q0. And here is the total cost that is associated of Q0 + x. Incremental cost is the difference between those two I see. So if you think about it this way what you're looking at is its the cost associated with your changed output less the cost thats associated with your original output.

Now that X can be things like a whole shifts worth of work it can be something along the lines of an extra twenty three days worth of production or something along those lines. What you are looking at is the additional cost induced by adding a little bit to your output that is right there. It could be a little bit or a lot. So, it could be what happens when you add a new product line? It could be what happens when you add a new shift? A new plant? Three plants? All these things are available for your incremental cost. Your in charge what that there is supposed to indicate.

Now the other derived cost is something called differential cost. And what differential cost is a comparison between two cost functions. So, we have a cost functions like this we call that cost function one. And we have another function like this, we will call it cost function two. Now, cost function one has a small fixed cost relative to cost function two. Cost function one also has a large average variable cost that alpha component relative to cost function number two that has a small alpha component. And what you are looking at for the differential cost is you are taking a specific level of the volume index over here and you are looking at the difference at what those two costs are. For the specific volume index. So you are looking at the difference between quantity two at that volume and cost one at that volume.

And so you are just looking at, again, the between two cost at the same volume level. So you are looking at, eventually we will be looking at, the cheapest way of actually supplying the actual a certain quantity of output right there. And that is the last derived cost that we are going to cope with.

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