A labor rate is total salary divided by the numbers of hours worked. Labor costs take into account productivity. However, costs may increase significantly because the new, lower-paid employee may be inexperienced, slow, and less capable. What is important is the employee's relative cost, and this is determined by the employee's productivity. Marginal cost is the single most important cost factor when determining how total cost changes as output changes.
Marginal cost is the change in total cost resulting from a one-unit change in output.
Numerically it is the change in total cost divided by the change in output. Marginal cost will reflect changes in the productivity of your staff members. Exhibit 2 demonstrates daily cost data on a hypothetical podiatry practice. The table lists the cost of production associated with alternative levels of production. Recall from exhibit 1 that the first three staff members contributed to increasing marginal returns, with each worker producing more than the last.