Final answer:
Equivalent units of output are the potential completed units given the amount of inputs used, and they relate to economies of scale where larger production volumes can reduce the cost per unit.
Step-by-step explanation:
Equivalent units of output are the whole units that could have been produced in a period given the amount of manufacturing inputs used. This concept is important to understand when analyzing production efficiency and cost accounting within businesses.
When discussing the optimal scale of production and economies of scale, we find that as a firm increases its quantity of output, the cost per unit often goes down due to spreading the fixed costs over a larger number of units. This phenomenon is exemplified by large warehouse stores such as Costco or Walmart, which can operate with lower average costs due to their scale.
To calculate average total cost, total cost is divided by the total output at various levels of production, and it's typical for average costs to have a U-shaped curve on a graph. Firms aim to produce where the average cost of production is less than the market price to ensure profitability.