Economies of scale

Economies of scale are the cost advantage of business expansion. The flip side is the diseconomies of scale, which is the cost disadvantage of business expansion. As the business expansion takes place, the unit cost of product manufacturing starts coming down, which can lead to an overall increase in the organization's profit (economies of scale).

There are two types of cost involved in industries- Fixed cost and variable cost. Fixed cost is the overall cost given one time for business expansion, and variable cost is taken over the time for business operation. The overall cost is the total of fixed and variable costs, as mentioned below:

                                                      

                                                         T.C. = F.C. + Q*V.C.

Where,

T.C. = Total cost

F.C. = Fixed cost

Q = Quantity

V.C. = Variable cost

The Point in the graph where the sales revenue crosses the total cost over the sales is called the break-even point. Below this Point, the company will be at a loss, and above, it will be in profit. The graph is essential for any organization starting from scratch because it will help determine the feasibility of a business idea by determining the break-even point. It will also help determine the advantage and disadvantages of cost (economies and diseconomies of cost).