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What is a Step Cost?

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A step cost is an additional investment that is required to increase the production of products or the capacity of a service.
Fixed costs such as the cost of a factory or data center typically remain static as you increase your business volumes. This results in economies of scale as the cost of a factory can be spread over more units as you produce more. A step cost occurs when property, plant or equipment approaches capacity and upgrades are required. This results in a jump in unit cost at discrete points as you reach various capacity limits.
Overview: Step Costs
Additional investments that are required to support business volumes as you approach capacity limits.
A bank's data center reaches its power limitations and can't handle any more equipment. The bank decides to install solar panels and replace aging computing equipment with more power efficient models, resulting in step costs to support business volumes.
Fixed vs Variable
In many cases, a step cost is a fixed cost such as an investment in equipment. However, a step cost can also result from a significant new investment in variable costs such as parts and labor. For example, a factory may need to add a new shift to increase capacity with a minimum of 20 employees per shift. The costs associated with hiring the 20 new employees represent a step cost to increase production past a certain point.
Related Concepts

Business Costs

This is the complete list of articles we have written about business costs.
Applied Cost
Business Equipment
Capacity Cost
Capital Improvement
Carrying Costs
Closing Costs
Cost Of Capital
Cost Of Revenue
Cost Of Living
Direct Cost
Distress Cost
Fixed Costs
Friction Cost
Employee Costs
Holding Costs
Intangible Cost
Marginal Cost
Operating Cost
Operating Expenses
Legacy Costs
Outlay Cost
Lifetime Cost
Overhead Costs
Menu Costs
Relevant Cost
Normal Costs
Sunk Costs
Tangible Cost
Operational Costs
Travel Expenses
Unit Cost
Opportunity Cost
Variable Costs
Prospective Cost
Semi Variable Cost
Step Costs
Switching Costs
Transaction Costs
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