Question

Low volume production has the following implication on the operations of an organisation.’ Choose the correct option:

(i) High unit costs

(ii) Low unit costs

(iii) Unit costs do not vary

(iv) Unit costs variation is not fixed

Answer 1

(i) High unit costs

Step-by-step explanation:

A low production volume results in high per-unit cost. The per-unit cost is derived by dividing the total cost by the total output. Total cost is a combination of variable costs and fixed costs. While fixed cost remains constant in the period, variable costs change with the production volume.

The fixed cost element is what makes a low volume production have a high per-unit cost. Since fixed costs are constant, a low quantity output means that a few units will share the fixed costs. The result is a high proportion of fixed costs per unit. The high per-unit fixed element cost makes a low volume output expensive compared to when the fixed costs are shared among many units.