An incremental cost (or revenue) is the additional cost (or revenue) that comes from a specific decision, usually a discrete step change in the operation. Adding an overtime shift, opening a new branch, buying a second machine: each generates incremental cost and possibly incremental revenue. Subtract one from the other to get the incremental profit of that decision.
Incremental costs are not the same as variable costs. Variable costs scale smoothly with quantity (2 per widget, …). Incremental costs are tied to a step, a discrete change in scope. A new shift adds payroll for the whole shift’s workers whether they make 100 widgets or 200; the incremental cost is the shift’s payroll, the variable cost on top of that is the per-widget material spend.
When comparing two alternatives, only the incremental differences matter. Costs that are the same under both alternatives wash out. Same principle that lets you ignore sunk costs: already paid, so identical under every future decision.
The related idea in project comparison is incremental investment analysis for ME projects under the IRR method: don’t pick the project with the highest IRR. Look at the IRR of the incremental cash flows between the two best candidates and check whether that incremental IRR clears the MARR.