What Is the Incremental Cost Effectiveness Ratio?

Incremental cost refers to the cost of the national economy that increases for the construction of a project. In the evaluation of national economic benefits, various resources lost to the national economy due to the construction of a certain project are the increased consumption of the national economy during the construction and production of the project. Incremental cost is different from the concept of cost in financial accounting, because the latter refers to the amount of money actually paid for the project to obtain the various resources needed during the operation. It includes not only the incremental cost, but also the past Sunk costs, such as depreciation and management fees, incurred and should be borne by the project. Therefore, when evaluating the national economic benefits of a proposed project, it must be identified from the national economic perspective as to the incremental costs of the project, and then the amount is measured to determine the total cost of the proposed project. ^[1]

concept

Incremental cost in the narrow sense: refers to the cost caused by the implementation of a specific program, if the program is not adopted, the incremental cost will not occur ^[2]

A machine factory rents the ground floor of a two-story industrial building with a floor area of approximately 10,000 square feet. The factory pays $ 1,000 per month for a three-year lease. The factory previously sent most of the mill work to a factory specializing in mill work. Now I am considering whether to do such a grinder work by myself. How to do it best if you do it yourself. It is estimated to add two surface grinders and one cylinder

When deciding whether to do something, people not only look at whether it is good for themselves, but also whether they have invested in it in the past. We call these irrecoverable expenses, such as time, money, and energy, "sunk costs." The concept of "sunk cost" is used in economics and business decision-making to refer to costs that have been paid and are not recoverable. Incremental and sunk costs are important concepts in management economics. Incremental cost refers to the change in total cost caused by a particular decision. Sunk costs refer to costs that have actually occurred as a result of past decision-making results. Since sunk costs represent past expenditures, no matter how large such expenditures are, they cannot be recovered and should not be cherished or regretted. At the time of decision-making, since the sunk cost does not affect the cost changes of the decision-making plan considered, at this time, attention should be paid to the analysis and research of incremental costs. As long as it can bring incremental profits to the future, it is acceptable. Without considering the sunk cost, only the incremental cost is considered, which reflects the forward-looking decision-making thinking.