Economies of Scale of a Manufacturing Plant
Economies of scale occur in a manufacturing plant when it costs less per unit to produce or operate higher levels of output produced. This holds true when the production or operating cost does not increase linearly without increase in the output levels and all the fixed costs can be spread over a large number of output units produced. Also true, when operating efficiency increases as training and workers experience improves as well any existing quantity discounts are available for raw and other input material purchased (Russell and Taylor, 2014). The firms increase in capacity using latest machines, technology and more efficient production processes that lower average cost at each level of capacity …show more content…
The economies of scale will turn into diseconomies in the long run, once the average total costs starts rising. As soon most, efficient scale is reached and expansion could actually cause increase in the average cost, generally due to the overhead when the firm becomes too large. The diseconomies of scale will provide the cut off line to end the advantages over the accumulated cost savings. There are many reasons to the rise in average cost such as value lost in the machines and others assets due to wear and tear. It also becomes obsolete, level of maintenance and age of the facility, and the demand for the product will go down or a changes needed to accommodate the trend in the …show more content…
As the firm grows over a period of time with many new changes, it introduces inefficiencies and sometime many level of approval causing delay in decision making and implementation strategy that increase the operation and product cost. Sometimes the company may employ many specialists and the cost increases proportionally. Diseconomy of scale also occurs when the cost of input raw material rises due to reasons including companies having significant force for its own input driving up its own input prices and raising its costs. Any additional expenses to the market the product or address any litigation that can also increase average production cost and hence diseconomy of
Economies of scale occur in a manufacturing plant when it costs less per unit to produce or operate higher levels of output produced. This holds true when the production or operating cost does not increase linearly without increase in the output levels and all the fixed costs can be spread over a large number of output units produced. Also true, when operating efficiency increases as training and workers experience improves as well any existing quantity discounts are available for raw and other input material purchased (Russell and Taylor, 2014). The firms increase in capacity using latest machines, technology and more efficient production processes that lower average cost at each level of capacity …show more content…
The economies of scale will turn into diseconomies in the long run, once the average total costs starts rising. As soon most, efficient scale is reached and expansion could actually cause increase in the average cost, generally due to the overhead when the firm becomes too large. The diseconomies of scale will provide the cut off line to end the advantages over the accumulated cost savings. There are many reasons to the rise in average cost such as value lost in the machines and others assets due to wear and tear. It also becomes obsolete, level of maintenance and age of the facility, and the demand for the product will go down or a changes needed to accommodate the trend in the …show more content…
As the firm grows over a period of time with many new changes, it introduces inefficiencies and sometime many level of approval causing delay in decision making and implementation strategy that increase the operation and product cost. Sometimes the company may employ many specialists and the cost increases proportionally. Diseconomy of scale also occurs when the cost of input raw material rises due to reasons including companies having significant force for its own input driving up its own input prices and raising its costs. Any additional expenses to the market the product or address any litigation that can also increase average production cost and hence diseconomy of