Skip to main content

Benefits: economies of scale

Economies of scale is the cost advantage achieved when an increase in production leads to a fall in the unit costs of production, as fixed costs are spread over a larger amount of products. Thus, a larger company will have a lower unit cost when compared to smaller companies. This is because larger companies have the capability to make more products

An example of economies of scale; if a company will pay $500 to keep 2000 bottled water in a storage facility, however this same storage facility has the capability to store 4000 bottled water. This same company now decides to increase the amount of bottled water it produces to 4000 units and keeps them in the same storage facility. Economies of scale is said to arise when the unit costs of storing drops from $0.25 ($500/2000) to $0.125($500/4000). The company ends up saving $0.125($0.25-$0.125) on each product as result of increasing its production.

Economies of scale could be internal or external. Companies can enjoy it externally when there is a development in their industry or economy which gives them an opportunity to produce more which in turn leads to a fall in the unit costs of the product. Internal economies of scale on the other hand as to do with your company itself, development within your company can help you achieve economies of scale internally.

Internal economies of scale can be achieved technically, a situation whereby a company invest in larger machineries which can then be used to produce more goods which will in turn reduce the unit costs of production. Buying in bulk is another way internal economies of scale can be achieved, as purchasing discounts can be obtained when goods are bought in bulk (a supermarket can use this medium to achieve economies of scale), buying goods in bulk will reduce its unit cost.

In all, if you have the ability to increase your level of production then do it as it will help you reduce your costs. Cost reduction can help you compete better in the business market as you will able to drop prices, thus your goods will cost lower. It can also help you increase your profit, as dropping prices will help you gain more market share which will in turn increase your profit.

That is all for today, thanks for reading this article. Keep checking out my blog regularly, cheers!

Comments

Post a Comment

Popular posts from this blog

How can your strategy be successful

Hello readers, today I will be telling you about ways to make your strategy a successful one. The scope is your strategy must be fit, in other words your strategy must be consistent with the environment your business operates in. When I say environment, I am talking about both external and internal environments. Thus, you must understand the political, economic, socio-cultural, technological and legal environments your business operates in. The environmental protection that affects your organisation must also influence you when formulating your strategy. Therefore, PESTEL analysis can be used to understand the external environment of your business. The internal environment also needs to be understood, as your strategy must also be in alignment with the internal environment. Understanding your internal environment will help you know the resources your business has, the capabilities of your business as well as the structure and system. The SWOT analysis can be used to help y...
Post a Comment
Read more

The Istikharah Prayer

Hello readers , today I will be telling you about the Istikharah prayer. It is a prayer of guidance. When you want to make a major decision in your life, it is best you seek Allah's guidance. You should always pray to Allah to guide you through the right path in your daily activities. Istikharah prayer is recommended for a major decision such as getting married, starting a business and others. How do you perform the Istikhara prayer? Make two rakats (Nafila). During your first rakat, after reciting Surat Fatiha recite Surat Ikhlas, during your second rakat  after reciting Surat Fatiha recite Surat Kaafirun. After saying Asalam Alaykum Waramatullahi to the right and then the left recite this: "Allahumma inni astakhiruka bi-ilmika wa astaqdiruka biqudra-tika, wa as'aluka min fadlikal Azeemi fainnaka taqdiru wa la aqdiru, wa ta'lamu wa la a'alamu, wa Anta Allamul-Ghuyubi, Allahum-ma in kunta ta'lamu anna  [then mention the thing to be decided] khairun ...
Post a Comment
Read more

How to Make Money from Gold

We used to operate in a gold standard system in the past, it is common knowledge that we presently operate in a dollar based system.  A system where each country measures the value of its currency against the dollar for the dollar based system and the gold for the gold standard system. The gold used to be a yardstick for measuring the value of a currency, although it is no longer used to measure the value of currencies these days, it has maintained it's prestigious value. Gold a very valuable metal, its prices depreciates at times and appreciates other times, but looking at its trend over 100 years, the prices have always appreciated over 10 years or above. From 2006 to 2015, the gold price per ounce appreciated by 200%, while from 2002 to 2015 it appreciated by 300%. So Long term investors go ahead and purchase gold. You must always pay zakat on the value of your gold when it reaches the nisab which is 87.48 grammes. However, you can give charity (sadaqa) from it. Alla...
Post a Comment
Read more