Incremental Costs and Sunk Costs
Conceptually, increment natal costs are closely related to the concept of marginal sot. Whereas marginal cost refers to the cost of the unit of output, incremental cost refers to the total additional cost associated with the marginal batch of output. The concept of incremental cost is based on a specific and factual principle. In the real world, it is not practicable for lack of perfect divisibility of inputs to employ factors for each unit of output separately. Besides, in the long run, firms expand their production; hire more men, materials, machinery, and equipments. The expenditures of this nature are the incremental costs, and not the marginal cost. Incremental· costs also arise owing to the change in product lines, addition or introduction of a new product, replacement of worn out plan and machinery, replacement of old technique of production with a new one, etc.
The sunk costs are those, which cannot be altered, increased or decreased, by varying the rate of output. For example, once it is decided to make incremental investment expenditure and the funds are allocated and spent, all the preceding costs are considered to be the sunk· costs since they accord to the prior commitment and cannot be revised or reversed when there is change in market conditions or change in business decisions.
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