Its 3 am and i dont have the brain activity to understand anything anymore. Please be as patronising as possible.
In: 23
Good answers in here but not ELI5 answers.
Economy of Scale.
For a new product say R&D cost 500,000 dollars and setting up the tooling cost another 500,000 dollars. We’ll ignore material cost and labor for a second. But if that line only produces a single unit. That unit can be said to be worth 1 million. Produce two and it’s half that and so on.
Now on to materials/base components. To specially only order a single part to create your unit will be incredibly expensive as each supplier will have the exact same issue on their hands. Getting off the shelf will be cheaper but with the disadvantage of having no say in what they are like. Also that supplier has already gone though the process.
That’s not even mentioning training the labor, which is expensive in its own right. And once trained, well, they are already there and if their job takes a minute, you’ll pay them the same to produce a single unit as you pay them to make 60.
So eventually that million+ dollar unit will essentially be let’s say $150 worth of materials plus what ever you are spending on labor with general overhead added on.
That’s economy of scale.
Latest Answers