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Hi Sir John,
the following lines are from the Kaplan Study text:
(3) Growth stage:
– In this stage sales volume increases dramatically, and unit costs fall as fixed costs are recovered over greater volumes, and variable production costs per unit fall due to economies of scalecan you please explain what the line “variable production costs per unit fall due to economies of scale” implies?
I mean as far as I know variable production costs p.u. remian the same however total variable cost goes down as the volumes increase.Please enlighten me where am I going wrong?
Although it does not have to happen, it is very common for the variable cost per unit to fall with higher production. For example, the cost of raw materials per unit might fall because we are buying bigger quantities and the suppliers give discounts for bigger quantities.
The total variable cost will always be higher with higher volumes, it is the cost per unit that is likely to reduce.
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