Final answer:
The cost of an off-airport warehouse is considered a facility-level cost for both an airport store and an individual bottle of water. These costs do not change with the number of units or batches produced but are inherent to the operation of the facility itself and affect the overall economies of scale.
Step-by-step explanation:
When considering the costs of an off-airport warehouse in relation to an airport store and an individual bottle of water, we need to understand how these costs are categorized. There are four main types of costs: unit-level, batch-level, product-level, and facility-level. Firstly, unit-level costs vary with the number of units produced or sold. Batch-level costs are associated with groups of units rather than individual units. Product-level costs are tied to the specific product's presence in the portfolio, and facility-level costs relate to costs that sustain the operation of a facility as a whole, irrespective of the variety or volume of products produced.
In context:
- a) For the airport store, the off-airport warehouse cost can be seen as a facility-level cost because it supports the entire operations and is not dictated by the production levels of a specific product or a batch.
- b) For an individual bottle of water, the warehouse cost cannot be attributed to a single unit and thus would still be seen as a facility-level cost due to the nature of the expense being necessary for the overall functioning of a facility that caters to multiple products.
These costs are essential in understanding the economies of scale, where increasing the quantity of output can lead to lower costs per unit. This is observed in larger facilities, such as warehouse stores like Costco or Walmart, which can produce or sell goods at a lower average cost compared to smaller entities. Therefore, as a company increases its scale of production or distribution, it needs to assess its facility-level expenses as key factors in achieving optimal economies of scale.