Final answer:
A firm's cost of sales can be low when it achieves economies of scale by increasing output, which decreases the cost per unit. This is often due to a competitive advantage in production technology or procurement of inputs. Warehouse stores like Costco and Walmart exemplify this concept with their large-scale operations.
Step-by-step explanation:
The firm's cost of sales (COGS) can be low when it can purchase its inputs at a lower cost than competitors and/or run its production process more efficiently. This is generally the case when a firm has a competitive advantage in production technology or the procurement of supplies. Having this advantage allows the firm to maintain lower production costs, enabling it to offer products at competitive prices while maintaining economies of scale.
Economies of scale refer to the situation where, as the quantity of output goes up, the cost per unit goes down. This situation is favored by firms that have determined the least costly production technology and can produce goods efficiently on a large scale. Successful examples of this include warehouse stores like Costco or Walmart.
In the long run, firms can adjust their production technology, making all costs variable. By substituting expensive inputs with more affordable ones where possible, firms strive to produce at the lowest possible long-run average cost. Consequentially, this leads to lower COGS and can provide a price advantage over competitors.