what does "Economies of scale in production" mean?

topcat
topcat Registered Posts: 452
in AAT Level 4 (Level 8 in Scotland)
Was going through a fininical performance practice exam and one part to the written answer was this but i have no idea what this part means "Economies of scale in production" meswell be in Chinese

.Anyone have any ideas?:confused1:
  • Labour
Labour cost per unit is £1 for Scenario 1 decreasing to £0.80 for Scenario 2. The more units that are produced, the lower the labour cost per unit. This will improve the margin for Scenario 2. It may be because of economies of scale in production or the learning effect.


Comments

  • Nps
    Nps Registered Posts: 782
    It just means that you can sometimes make savings if you produce in large quantities. Eg. You may be able to buy materials with a bulk discount, or it might be quicker to make one batch of 10 rather than 10 batches of 1. In other words, the unit cost price of each item may fall, the more you make in one go. The Learning Curve is a theory that allows you to calculate how much labour time is reduced by as the workers get more skilled in that procedure. There are formulae to work it out but I don't think that's covered in AAT.
  • topcat
    topcat Registered Posts: 452
    Nps wrote: »
    It just means that you can sometimes make savings if you produce in large quantities. Eg. You may be able to buy materials with a bulk discount, or it might be quicker to make one batch of 10 rather than 10 batches of 1. In other words, the unit cost price of each item may fall, the more you make in one go. The Learning Curve is a theory that allows you to calculate how much labour time is reduced by as the workers get more skilled in that procedure. There are formulae to work it out but I don't think that's covered in AAT.

    thanks NPS brilliant explanation as always :001_smile:

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