Question

Explain incremental revenues and incremental costs. Provide a business example for each of these terms.

Answer 1

Incremental revenues are additional revenues that a business can generate from an additional quantity of sales during a given period. In other words it is the additional revenue from an additional quantity. A business example of incremental revenue can be seen from the below hypothetical example – suppose GE has developed a new technology for aviation engines and that these new engines can be sold alongside its regular engines. The company estimates a sale of 1,000 new engines with a price of $50,000 each and a cost of $10,000 each during the current quarter period. Thus incremental revenue = 1,000 engines *$50,000 per engine = $50,000,000. Thus GE is able to earn incremental revenue of $50,000,000 as a result of a change in its manufacturing activity. Here as the new technology enables GE to earn an additional $50,000,000 in revenues it will make engines using the new technology.

Incremental costs can be defined as difference in total costs as a result of change in some activity. In the above example the change in activity is the introduction of the new technology. The incremental cost will be = 1,000 engines * cost of $10,000 per engine = $10,000,000