What is constant marginal cost?
Constant marginal cost is the total amount of cost required for a firm to produce a single unit of output if that cost never changes. As the cost is the same for each unit produced, it is considered a constant. The variable part of the equation for estimating costs is the total volume of items the company produces. As this quantity changes, labor costs also change, even though constant marginal cost remains unchanged.
Companies that produce items in large quantities must always be aware of the costs associated with production. This requires finding methods to estimate these costs before production orders are completed. By making these estimates, management can properly budget any order size it may receive, while ensuring it improves the company's bottom line. Understanding the concept of constant marginal cost is important for companies to establish production systems that allow them to produce goods at a constant cost rate, regardless of order size.
Trying to understand this concept can be tricky, as the name indicates two seemingly opposite things that work against each other. Marginal cost is the cost required to produce a single item. If this cost is constant, it means that an item will cost exactly the same whether it is the first item produced for an order or the millionth. For example, if it takes a company $100 US dollars (USD) to manufacture a single item and that doesn't change for an entire order, then the constant marginal cost is $100.
It is also important to separate this cost from fixed costs. Fixed costs are those related to production, regardless of the scenario. For example, simply turning on the lights in a factory costs the parent company a certain amount of money. These costs will be incurred whenever production is in progress. Constant marginal cost, remaining the same, will be multiplied by the number of items produced to generate variable costs, which, unlike fixed costs, change with order size.
When estimating production costs, constant marginal cost is usually part of a linear cost function. Total costs will equal fixed costs plus variable costs, which, as mentioned above, depend on marginal cost. This function is linear because the marginal cost is constant, which causes the values for the number of items produced and the total costs, when displayed on a graph, to form a straight line. This is not the case when marginal cost varies with the number of items produced.