Question

How do unit-level costs behave in relation to the product life cycle? Batch-level costs? Product-level costs? Facility-level costs?

Answer 1

The product life cycle consists of four phases: introduction, growth, maturity, and decline. During the introduction phase, start-up expenses are high and sales are low. In the growth phase, sales increase and so do profits. The maturity phase is marked by stable costs and relatively high sales. In the decline phase of the product life cycle, sales fall; costs may or may not fall, depending on the circumstances.

              Unit-level costs are highest in the introduction phase. They begin to fall in the growth phase as learning takes effect and material quantity discounts may occur. The maturity phase should lead to stable unit-level costs. The decline phase, with fewer units produced, does not enjoy quantity discounts, but unit costs may remain low due to the liquidation of existing inventories and the avoidance of increasing prices.

              Batch-level costs follow a pattern similar to that of unit-level costs. However, in the maturity phase, batch-level costs may increase as product differentiation occurs. Setup number and complexity increase, purchasing orders rise, and inspection costs may increase. Finally, in the decline stage, batch-level costs again fall as product lines are streamlined to just a few best-selling lines and batches decrease in number and complexity.

              Product-level costs are highest in the introductory phase and generally fall throughout the rest of the life cycle—with possible spikes upward for new models in the maturity phase.

              Facility-level costs may or may not be affected unless the product calls for a new facility or equipment—then they are highest in the introductory phase.

The product life cycle consists of four phases: introduction, growth, maturity, and decline. During the introduction phase, start-up expenses are high and sales are low. In the growth phase, sales increase and so do profits. The maturity phase is marked by stable costs and relatively high sales. In the decline phase of the product life cycle, sales fall; costs may or may not fall, depending on the circumstances.

              Unit-level costs are highest in the introduction phase. They begin to fall in the growth phase as learning takes effect and material quantity discounts may occur. The maturity phase should lead to stable unit-level costs. The decline phase, with fewer units produced, does not enjoy quantity discounts, but unit costs may remain low due to the liquidation of existing inventories and the avoidance of increasing prices.

              Batch-level costs follow a pattern similar to that of unit-level costs. However, in the maturity phase, batch-level costs may increase as product differentiation occurs. Setup number and complexity increase, purchasing orders rise, and inspection costs may increase. Finally, in the decline stage, batch-level costs again fall as product lines are streamlined to just a few best-selling lines and batches decrease in number and complexity.

              Product-level costs are highest in the introductory phase and generally fall throughout the rest of the life cycle—with possible spikes upward for new models in the maturity phase.

              Facility-level costs may or may not be affected unless the product calls for a new facility or equipment—then they are highest in the introductory phase.