Question

How would you describe the significance of Economies of Scale and why they are relevant to direct and indirect cost and to management in general?

What does this provide for a organization?

Answer 1

Economies of Scale- This is a strategy of minimizing cost, in this strategy, products are manufactured at a large scale so as to save the cost. As the production increases, the cost comes down. It can be achieved by:

1. Buy in bulk.
2. Manufacturing in bulk.

Significance of Economies of Scale on direct and indirect cost- Company can reduce cost by achieving economies of scale:

1. The greater the quantity is produced, per unit fixed cost comes down. For example; Factor rent will be same if 1000 units are produced or 5000 units are produced but the per unit fixed cost will come down so there will be saving in fixed cost.
2. Per unit Variable cost also comes down as the level of production increases because synergy and operational efficiency are achieved.
3. Direct cost that contains direct labor, direct material and manufacturing overheads come down when units produced are more.
4. Indirect cost that contains factory rent, factory insurance also come down because more units are being manufactured in the same factory.

This helps organization in increasing the margin levels because overall cost comes down. Profit increases.