What is the difference between incremental cost and average cost?

• A. Incremental cost is the sum of all costs; average cost is the difference between options.
• B. Incremental cost is the difference between two options; average cost is total cost divided by units produced or treated.
• C. Incremental cost is total cost divided by outcomes; average cost is the sum of costs across all units.
• D. Incremental cost is the cost per unit; average cost is the total expenditure.

Answer: (B)

Incremental cost is the change in total cost that results from choosing one option over another; it’s the additional amount you would incur by taking the alternative. It focuses on the difference between options rather than the overall cost or a per-unit measure. Average cost, on the other hand, is the total cost divided by the units produced or treated, giving the cost per unit. So, incremental cost tells you the extra cost of a specific decision, while average cost tells you how much each unit costs on average. For example, if one option costs 100 in total and another costs 150, the incremental cost of choosing the latter is 50. If total cost is 120 and 24 units are produced, the average cost per unit is 5.