# Episode 7: What Changes at the Margin

Separates fixed, variable, step, avoidable, and sunk costs for service decisions.

## Sources and attribution

- [Cost Analysis](https://uw.pressbooks.pub/financialstrategy/chapter/cost-analysis/) by Sharon Kioko and Justin Marlowe; published by University of Washington Pressbooks.
- [Budget Documents](https://www.torranceca.gov/Government/Departments-Offices/Departments-Offices/Finance/Budget-Documents) by City of Torrance; published by City of Torrance.

This episode is an independent study production based on the sources listed above. Source attribution does not imply affiliation, approval, sponsorship, or endorsement by any author, publisher, or institution.

## License

CC BY 4.0; adapted by condensation, paraphrase, and reorganization; third-party material excluded; Official local source; titles, high-level facts, and links used; no broad open license identified

## Production notes

Independent educational adaptation. Not financial, accounting, investment, or legal advice, and not endorsed by the source authors or publisher. The narration is an original synthesis. Verify current law, guidance, course requirements, and source terms before relying on it.

Stable episode ID: `a9484b03-5967-5916-a14e-b5fce46f2520`

## Transcript

A decision depends on costs that change between alternatives, not every cost assigned to a program. Marginal and incremental analysis separates relevant future differences from totals that will remain the same.

This episode adapts Kioko and Marlowe's chapter Cost Analysis, published by University of Washington Pressbooks under Creative Commons Attribution 4.0 except where otherwise noted. It condenses, paraphrases, and reorganizes the authors' explanatory prose. Separately credited cases, examples, figures, tables, quotations, and linked materials are excluded.

Variable costs move with activity, while fixed costs remain stable within a relevant range and time period. Step costs remain fixed until demand crosses a capacity threshold, then jump. Over a longer horizon, costs that looked fixed may become adjustable through staffing, leases, or capital replacement.

Avoidable costs disappear if an activity stops. Sunk costs have already been incurred and should not drive the next choice. Opportunity cost represents the value of the best alternative use of constrained staff time, space, cash, or equipment. These categories are decision-specific rather than permanent labels.

Build scenarios around service units and capacity. Separate volume from price, identify bottlenecks, and test thresholds. An outsourcing proposal should include contract management, transition, quality control, retained overhead, and risk, not merely compare a vendor quote with allocated full cost.

Avoid the average-cost trap. Dividing total annual cost by annual units can describe history, but it may not predict the cost of one more unit or the savings from one fewer unit. Show the relevant range, time horizon, capacity threshold, and resources that truly change. Include implementation delay and reversal cost when an option is difficult to unwind.

Torrance application segment. This original local exercise is separate from the textbook and cites the City of Torrance Budget Documents page, checked October seventh, twenty twenty-six, at torrance C A dot gov slash Government slash Departments Offices slash Finance slash Budget Documents.

Suppose a hypothetical City service faces higher demand. Begin with the current adopted budget and latest review records only to identify authorized resources and the reporting period. Model a base case, added-volume case, and capacity-threshold case. Separate overtime, materials, contracted capacity, supervision, facilities, and capital. Record which costs are avoidable, which remain, and when a step increase occurs. This exercise does not claim that any Torrance service has excess demand or recommend staffing, contracting, or capital action.

The result should show both financial and operational consequences. A cheaper option that shifts waits, errors, safety risk, or unpaid work to residents is not equivalent service. Marginal analysis is strongest when it states what changes, what does not, and who experiences the difference.

This adaptation credits Sharon Kioko and Justin Marlowe and is licensed under Creative Commons Attribution 4.0. Changes include condensation, paraphrase, reorganization, and a separately sourced Torrance application. No author, publisher, or City endorsement is implied.