What is an Incremental Cost? Definition Meaning Example

The analysis shows that the incremental cost of all street vehicles (other than in the case of compact car PHEVs) that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500 in calendar year 2023. This strategic move is intended to increase overall profitability while maintaining the company’s return on investment (ROI). A 5% annual discount rate was applied to both costs and effects based on the suggestion of China Guidelines for Pharmacoeconomic Evaluations [23]. Alternative A reports a net income amounting to $750,000, while Alternative B’s net income totals $855,000. Based purely on the available financial information, the management team should decide to take on Alternative B as a new and/or additional segment. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.

Incremental cost can be defined as the encompassing changes experienced by a company within its balance sheet because of one additional unit of production. However, the incremental cost cannot always be the same as the average cost per unit due to different (fixed and variable) costs involved. Moreover, the incremental cost is always made up of purely variable costs. It characterizes the added costs that might not exist if an extra unit was not produced. In conclusion, regular 5% sodium fluoride varnish application was a cost-effective strategy for preventing root caries in the elderly persons in most scenarios (70.5% of the simulated cases). Improved public dental health awareness may make the intervention more cost-effective.

Data availability

Incremental cost is the additional cost incurred by a company if it produces one extra unit of output. The additional cost comprises relevant costs that only change in line with the decision to produce extra units. This consists of all variable costs of production including labor, inventory, and any other expenses involved with the cost of producing one item. Incremental Cost captures all pertinent costs impacted by the choice to increase production beyond a simple analysis of changes in variable costs.

It is a common approach to set 1–3 times gross domestic product (GDP) per capita as the ICER threshold to evaluate the cost effectiveness of an intervention [24, 25]. However, since our study did not use quality adjusted life year (QALY) or disability-adjusted life year (DALY) as the health outcome, GDP per capita was probably not a proper threshold in our case. A WTP of ¥214 was set as the threshold of the cost-effectiveness analysis, which represented the cost for a filling of root caries tooth in Chinese public healthcare system (the same as the cost of direct restoration of base case value). However, as there is an absence of appropriately elicited or generally accepted WTP threshold for oral health-specific outcomes [26], it is suggested that decision makers should interpret the results with caution. First, the sources of transition probabilities did not have similar scenarios or populations.

What is Incremental Cost?

Incremental costs are also used in the management decision to make or buy a product. Some custom products might not be readily available for the business to buy, so the business has to go through the process of custom ordering it or making it. The distribution of fixed costs to total costs decreases proportionately with the number of units produced, so extra care must be taken. Understanding incremental costs becomes critical for businesses looking to increase their productivity and overall profitability. If the LRIC increases, it means a company will likely raise product prices to cover the costs; the opposite is also true. Forecast LRIC is evident on the income statement where revenues, cost of goods sold, and operational expenses will be affected, which impacts the overall long-term profitability of the company.

The incremental cost-effectiveness ratio (ICER) was calculated to evaluate cost-effectiveness. Univariate and probabilistic sensitivity analyses were performed to evaluate the influence of data uncertainty. Regular 5% sodium fluoride varnish application was cost-effective for preventing root caries in the elderly persons in most scenarios with the consideration of data uncertainty, but to a limited extent.