Your Ask Joey ™ Answer

What is economies of scale?

Economies of scale illustrate the advantages companies are able to realize from increasing their volume or output. For example, if the fixed cost to operate in the automotive industry is $100,000, then producing 100 cars instead of 5 cars represents a lower fixed cost per unit and overall cost per unit. Due to the higher output, the company would have economies of scale.

Economies of scale example

This concept is often associated with scaling a business or microeconomics, and the top of barriers to entry. If there is a large upfront or fixed cost to produce one or a few cars, then a company might not enter that market as it would take years for them to reach the cost per unit that existing players in the industry already have. Other examples include shipping companies, distribution networks, etc.


Back To All Questions

You might also be interested in...

  • Discontinued Operations on the FAR CPA Exam

    Overview of Discontinued Operations In financial reporting, discontinued operations refer to a component of a company’s core business or product line that have been divested or shut down. Discontinued operations will be reported (net of tax) separately from continuing operations on the income statement. The reason that discontinued operations are reported separately is so that...

  • Equity Method Excel Workbook

    If you would like to use the Excel workbook that was used to create the Universal CPA lecture on the equity method, please click the link below to download the Excel workbook: Equity Method Lecture Example https://youtu.be/QE4flnmuSkw

  • How Hard is the CPA Exam?

    So you’re thinking about taking the CPA exam? Whether you have a dream of becoming a tax advisor, feel as though you need public accounting experience, or just want to solidify your business acumen, the CPA license is one of the most prestigious and well respected licenses in the business world. The exam itself is...