Essay about Economies Of Scale Of A Manufacturing Plant

836 Words Dec 4th, 2015 4 Pages
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 utilization.

Depending on the business strategy the effect of the economies of scale varies. We can analyze the effect using the calculated the average total cost, when we start the new product in a small quantity that will have high unit cost. As soon as business grow, and acquire capacity of producing larger output to ramp up its production, the fixed cost is spread over large output quantity and the cost comes down. The big companies employ a specialized machine and well trained labors to work quicker and acquire required capital very easily. For this reason, in a competitive environment, the larger firms achieve cost advantages over their smaller rivals. The large firm gets better purchase deal due to large volume, when it comes…

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