Final answer:
Companies use a predetermined rate to allocate manufacturing overhead to products, and mathematical models assist in selecting cost-effective production methods. Economies of scale are important for reducing cost per unit as production quantity increases, with large factories being able to produce more cheaply than smaller ones.
Step-by-step explanation:
Companies assign manufacturing overhead to work in process on an estimated basis through the use of a predetermined overhead rate. This rate is used to apply overhead costs to products based on a consistent activity measure, such as machine hours or labor hours. Mathematical models are utilized to estimate these costs, and comparisons are often made to determine the most cost-effective production technology.
Once the least costly production option is identified, businesses must decide on the optimal scale of production. Economies of scale suggest that as production volume increases, the cost per unit decreases, allowing larger factories to produce more affordably than smaller ones. For instance, if production technology 3 has the lowest total cost due to cheaper machine hours, it would be logical for a firm to shift towards using more machines and less labor, thus optimizing production costs.
Economies of scale are an important consideration, where an increase in the quantity of output leads to a decrease in the cost per unit. Large-scale retailers like Costco or Walmart exemplify the practical application of economies of scale, passing on the benefits of mass production to consumers in the form of lower prices.