Incremental Costs
One of the fundamental principles in engineering economic analysis is that in making a choice among a set of competing alternatives, focus should be placed on the differences between those alternatives. This is the concept of incremental costs. For instance, one may be interested in comparing two options to lease a vehicle for personal use. The two lease options may have several specifics for which costs are the same. However, there may be incremental costs associated with one option not required or stipulated by the other. In comparing the two leases, the focus should be on the differences between the alternatives, not on the costs that are the same.


Philipis choosingbetweenmodelA (a budgetmodel) and model B (with more features and a higher purchase price). What incremental costs would Philip incur if he chose model B instead of the less expensivemodel A?


We are interested in the incremental or extra costs that are associated with choosing model B instead of model A. To obtain these we subtract model A costs from model B costs for each category (cost item) with the following results.

Notice that for thecost categories given, the incremental costs of model B are both positive and negative. Positive incremental costs mean thatmodel B costs more than model A, and negaive incremental costs indicate that there would be a savings (reduction in cost) ifmodel B where chosen instead.

Because model B has more features, a decision would also to reflect consideration the incremental benefits offered by that model.


Post a Comment