Question

Description Dawson Toys, Ltd., produces a toy called the Maze. The company has recently established a standard cost system to help control costs and has established the following standards for the Maze toy: Direct materials: 6 microns per toy at $1.50 per micron Direct labour: 1.3 hours per toy at $21 per hour During July, the company produced 3,000 Maze toys.

Answer 1

The concept discussed is economies of scale, which refers to the reduction in average cost per unit when production is scaled up. This is evidenced by the different costs at factories with varying outputs, where larger production quantities result in lower average costs per alarm clock.

Step-by-step explanation:

The student's question involves the concept of economies of scale in a business context, specifically in manufacturing. Economies of scale are essentially cost advantages that businesses obtain due to scale of operation, with cost per unit of output decreasing with increasing scale as fixed costs are spread out over more units of output.

Figure 7.9 demonstrates this concept by comparing the average costs of production for factories of different sizes. A small-sized factory (S) with an output of 1,000 alarm clocks has an average cost of $12 per clock. A medium-sized factory (M), with an output of 2,000, reduces the average cost to $8 per clock. Finally, a large factory (L) with a production output of 5,000 clocks has the lowest average cost, at $4 per clock. This illustrates how economies of scale work: as production scales up, the average cost of producing each item goes down.