Question

Kubin company’s relevant range of production is 20,000 to 23,000 units. when it produces and sells 21,500 units, its average costs per unit are as follows:

Answer 1

The student's question concerns the concept of economies of scale, which explains how increasing production can lead to lower average costs up to a certain point, beyond which no additional cost savings are realized.

Step-by-step explanation:

The question revolves around the concept of economies of scale, a principle in business and economics that explains how the average costs of production can decrease as the quantity of the product produced increases. This principle suggests that as companies grow larger and their production output increases, they can spread out their fixed costs over more units, resulting in a lower cost per unit. To illustrate this, consider the given examples where different production plants are producing toaster ovens and alarm clocks at different scales. Production plant S has a higher average production cost compared to plant M, L, and V which benefit from economies of scale up to a certain production level beyond which the average cost of production remains constant as seen in plant V's case. This indicates there is an optimal level of production that maximizes economies of scale, but increasing production beyond that level does not result in further cost reduction.

Answer 2

The cost per unit is derived from the variable costs and fixed costs incurred by a production process, divided by the number of units produced. Hypothetically lets say variable costs for Kubin company's production is $50,000 and their fixed costs are $25,000. $50,000 variable costs + $25,000 fixed costs / 21,500 units = $3.49/unit.