Applying Marginal Cost Analysis to Software Development

Both software development organizations and traditional manufacturing organizations produce and distribute products. However, software companies differ from traditional manufacturing organizations in several important ways that require modification of the methods used to analyze cost and profit. For example, when a manufacturing organization builds, say, an appliance, the marginal costs include the costs of raw materials and labor to produce the appliance. To sell one more unit, more production work is required, which of course increases marginal costs. However, this is not the case with software. After a software application is created, to sell one more unit, a software company need only ...

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