unit costs and efficiency

• What are unit costs?

  Unit costs are a key indicator of the efficiency and productivity of a business. They are also critical to the profitability and competitiveness of many businesses.

  The unit cost measures the average cost per unit produced, as measured over a particular time period
• Unit Cost Calculations


  total production costs in period (£) / total output in period (units)
• Economies of Scale


  Scale economies have brought down the unit costs of production and have fed through to lower prices for consumers.
• Internal economies of scale

  Technical economies of scale

  Specialisation of the workforce

  Marketing economies of scale

  Managerial economies of scale
• External economies of scale

  • Development of research and development facilities in local universities that several businesses in an area can benefit from

  • Spending by a local authority on improving the transport network for a local town or city

  • Relocation of component suppliers and other support businesses close to the main centre of manufacturing are also an external cost saving
• Labour Intensive


  Firms benefit from access to sources of low-cost labour

  Costs are mainly variable = lower breakeven output

  Labour costs higher than capital costs
• Capital Intensive


  Capital costs higher than labour costs

  Costs are mainly fixed = higher breakeven output

  Firms benefit from access to low-cost, long-term financing
• Benefits of Labour Intensity

  Unit costs may still be low in low-wage locations

  Labour is a flexible resource – through multi-skilling and training

  Labour at the heart of the production process – can help continuous improvement
• Drawbacks of Labour Intensity

  Greater risk of problems with employee/employer relationship

  Potentially high costs of labour turnover

  Need for continuous investment in training
• Benefits of Capital Intensity

  Greater opportunities for economies of scale

  Potential for significantly better productivity

  Better quality & speed

  Lower labour costs
• Drawbacks of Capital Intensity

  Significant investment

  Potential for loss competitiveness due to obsolescence

  May generate resistance to change from labour force