The cost to manufacture one unit of Killian Audio Products' best-selling hearing aid, the Zone, is $67.50. The CFO of the company determines that if the company expands the output of its biggest U. S. plant by 20 percent, the unit cost would be only $42.50. This analysis is based on the concept of

Economies of scale

Explanation:

Economies of scale refers to reducing total costs per unit by increasing total output. All companies have certain fixed costs, some companies have higher fixed costs than others, but they always exist. When you are producing something, the cost equation is production costs = variable costs per unit + average fixed costs per unit.

Variable costs vary directly with output, while fixed costs do not, e.g. salaries can be fixed, depreciation, rent, interests, etc. The higher the output, the lower the average fixed cost per unit.

Also, sometimes variable costs can also decrease as total output increases. E.g. you can get higher discounts for purchasing larger quantities of materials and supplies.

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