Final answer:
The sensitivity of EBITDA to changes in unit sales in the context of automated versus manual production represents the financial impact of scaling production on profitability, where economies of scale lead to a reduced average cost per unit with increased production.
Step-by-step explanation:
The concept in question refers to EBITDA and its sensitivity to changes in unit sales within different production scenarios—namely, automated versus manual production in a hammock-manufacturing example. The sensitivity of EBITDA is an important aspect of business financial analysis, illustrating how profit margins are affected by the volume of units sold. Economies of scale play a crucial role here as they describe the reduction in average cost per unit when production scales up. For instance, in the production of toaster ovens, we see that as the output increases from a small scale (30 units at $30 each) to a medium scale (50 units at $20 each), and then to a large scale (150 units at $10 each), the average cost per unit decreases significantly.
This principle underlines the importance of deciding the optimal scale of production, as businesses, particularly those like warehouse stores such as Costco or Walmart, benefit from a lower average cost with larger scaled operations. By understanding the relationship between unit sales, production technology, and EBITDA, businesses can make more informed pricing and production decisions to maximize profitability.