Business – 9.1 Location and scale – Scale of operations | e-Consult
9.1 Location and scale – Scale of operations (1 questions)
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Model Answer: The table illustrates how unit cost changes as output rises from 1,000 to 10,000 units.
| Output (units) | Average Cost (£ per unit) |
| 1,000 | £12.00 |
| 2,500 | £9.50 |
| 5,000 | £7.80 |
| 7,500 | £7.60 |
| 10,000 | £8.20 |
Analysis:
- From 1,000 to 7,500 units, average cost falls, indicating economies of scale. The steepest fall occurs between 1,000 and 5,000 units, reflecting significant spreading of fixed costs and technical efficiencies.
- Between 7,500 and 10,000 units, average cost rises from £7.60 to £8.20, signalling the onset of diseconomies of scale. This could be due to management complexity or resource constraints as the firm approaches its capacity limit.
The minimum efficient scale is therefore around 7,500 units, where the unit cost is lowest.