If a company produces four products A, B, C and D then the production manager wants to decide which product should be produced in large amount or small amount to increase profit or to decrease cost which industrial concept should use the production manager to make the decision?
The production manager can use the concept of "Economies of Scale" to make the decision on which product should be produced in large or small amounts to increase profit or decrease costs.
Economies of Scale refer to the cost advantages that a company can achieve by increasing the production scale or output level of its operations. In simple terms, when a company produces in large quantities, it can benefit from lower average costs per unit.
To apply the concept of economies of scale, the production manager should consider the following steps:
1. Calculate the cost per unit for each product: Determine the production costs associated with each product, including raw materials, labor, and overhead expenses. Divide the total cost by the total number of units produced to get the cost per unit for each product.
2. Identify the scale of production for each product: Determine the current production levels for products A, B, C, and D. Evaluate if any product is being produced below its optimal scale or if there are inefficiencies due to overproduction.
3. Analyze the economies of scale: Calculate the economies of scale for each product by examining how the average cost per unit changes with different levels of production. Typically, the higher the production volume, the lower the average cost per unit due to spreading fixed costs over a larger output.
4. Consider demand and market conditions: Assess the demand and market conditions for each product. Examine the price sensitivity and sales potential of each product, as well as the expected growth or decline in demand.
5. Make strategic decisions: Based on the analysis of economies of scale and market conditions, the production manager can decide which product(s) should be produced in large amounts to take advantage of cost savings, or which product(s) should be produced in smaller quantities to meet specific market demands or minimize costs.
By applying the concept of economies of scale and considering market conditions, the production manager can optimize production levels for each product to increase profitability and reduce costs for the company.