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Hello Sir,
I don’t understand the meaning of economies of scale here are the two sentences the first one is regarding the consequences of assumption of constant varible cost per unit in CVP analysis and the second sentence is related to market penetration pricing .Please explain me these points whilst making clear the concept of economies of scale1.The variable cost per unit will decrease where economies of scale are made at higher output volumes, but the variable cost per unit will also eventually rise when diseconomies of scale begin to appear at even higher volumes of output (for example the extra cost of labour in overtime working.
2.Market penetration pricing is suitable when there are significant economies of scale to be achieved from a high volume of output.
Thank youThe more units we make, then the more efficient we can be, and therefore the cost per unit may be lower (not always, but often). However, if it gets to the stage where the factor is over-loaded then the cost per unit might start to increase (again, not always, but it is possibility.)
With penetration pricing, we charge a low price to gain market share, but this would mean less profit per unit. However if selling more results in lower costs per unit, then we can afford to charge a lower price 🙂
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