The relationship between the scale of production and unit cost.

Business and Commercial Practices – Topic 14

Objective

To understand how the commercial environment influences product design and production, with a particular focus on the relationship between the scale of production and unit cost.

1. Syllabus Overview (Cambridge International AS & A Level Design & Technology 9705)

• Product life‑cycle (PLC) stages
• Product‑extension strategies (including brand‑ and service‑extension)
• Market‑research methods
• Target‑customer profiling (demographic, socio‑economic, geographic, psychographic)
• The 4 Ps of marketing (Price, Product, Promotion, Place)
• Scale of production ↔ unit cost (economies & diseconomies of scale, break‑even, marginal cost)
• Link between commercial decisions and design choices (materials, processes, modularity, TQM)

2. Product Life‑Cycle (PLC)

The PLC shows the typical pattern of sales, profit and cost from a product’s introduction to its withdrawal.

1. Research & Development (R‑D) – concept generation, feasibility studies, prototype testing.
2. Introduction – low sales, high unit cost, heavy marketing spend.
3. Growth – rapid sales increase; unit cost falls as economies of scale are realised.
4. Maturity – sales peak, competition intensifies; cost reductions level off.
5. Decline – sales fall; unit cost may rise if volumes drop.

Design decisions made in the R‑D stage (material choice, manufacturing process, modularity, TQM) aim to position the product for the growth and maturity phases.

3. Product‑Extension Strategies

When a product reaches maturity or decline, firms can extend its market life by altering one or more elements of the marketing mix.

Extension tactic	Typical change	Design‑technology example
Price discount	Lower selling price, often with a reduced‑cost version	“Lite” version of a power tool with fewer accessories
Re‑packaging	New packaging size or design to attract different users	Mini‑pack of a cosmetic product for travel markets
Added features	Enhancement of functionality or aesthetics	Bluetooth connectivity added to an existing speaker model
New market segment	Targeting a different demographic or geographic market	Adapting a school‑desk design for co‑working spaces
Brand‑extension	Using an established brand name for a new product category	Launching a “Dyson‑Air‑Purifier” under the Dyson brand
Service‑extension	Adding a service element to the core product	Providing a 2‑year on‑site maintenance contract for a CNC machine

4. Market‑Research Methods

Reliable data are essential for deciding the appropriate scale of production, price, and promotional tactics.

• Surveys – structured questionnaires (online or paper) for quantitative data on preferences, willingness to pay, and expected purchase volumes.
• Interviews – semi‑structured conversations that reveal deeper insights into user needs and perceived value.
• Focus groups – moderated group discussions that uncover attitudes, language, and potential design improvements.
• Observation – watching users in real contexts (e.g., ergonomics testing) to identify hidden requirements.
• Secondary research – analysing published statistics, competitor reports, and industry trends.
• Online analytics – social‑media listening, website traffic analysis and keyword trends that give real‑time market signals.

These sources help estimate the likely output Q and the price point customers will accept, both of which are vital for cost‑volume analysis.

5. Target‑Customer Profiling

Segmentation enables designers to tailor a product to a specific group, influencing the scale at which it can be produced profitably.

Segmentation basis	Typical profile	Implication for scale
Demographic	Teenagers (15‑19 yr), low disposable income	High volume, low unit cost required; simple design, inexpensive materials.
Socio‑economic	Professional adults, high income	Lower volume acceptable; premium materials, higher unit cost.
Geographic	Urban commuters	Medium volume; design for compactness and durability.
Psychographic	Eco‑conscious lifestyle, values sustainability	May accept higher price for recycled materials; moderate volume, focus on brand story.

6. The 4 Ps of Marketing and Unit‑Cost Considerations

1. Price – Must cover unit cost plus profit margin. Break‑even analysis (see § 8) determines the minimum viable price.
2. Product – Design choices (materials, processes, modularity) affect both fixed and variable costs.
3. Promotion – Advertising, digital campaigns (influencer marketing, social‑media ads) are part of fixed costs; larger production runs can spread these costs.
4. Place (Distribution) – Logistics costs can be variable (per unit) or fixed (warehouse lease). Scale influences transport economies and channel selection.

7. Scale of Production ↔ Unit Cost

7.1 Cost structure

• Fixed Costs (FC) – Do not vary with output (e.g., plant rent, depreciation, salaried staff, tooling).
• Variable Costs (VC) – Vary directly with the number of units (e.g., raw material, hourly labour, consumables).

The total cost (TC) and unit cost (UC) are expressed as:

$$ TC = FC + VC \qquad\text{where}\qquad VC = v \times Q $$ $$ UC = \frac{TC}{Q}= \frac{FC}{Q}+v $$

As output Q rises, the fixed‑cost component per unit ($FC/Q$) falls, producing **economies of scale**. When Q becomes excessive, additional costs (management complexity, equipment wear, morale) cause **diseconomies of scale**.

7.2 Economies of Scale – key drivers

• Spreading fixed costs over more units.
• Bulk purchasing → lower material cost per unit.
• Specialisation of labour and higher equipment utilisation.
• Technical improvements (automation, CNC, injection moulding).
• Learning‑curve effects – each doubling of cumulative output typically reduces average labour time by 10 % (the classic “10 % rule”).
• Economies of scope – using the same facilities to produce a range of related products.

7.3 Diseconomies of Scale – typical causes

• Additional managerial layers → slower decision‑making.
• Over‑crowded factories → material‑handling delays.
• Higher maintenance & downtime for heavily used machinery.
• Reduced employee morale and higher error rates.
• Regulatory compliance costs that rise with organisational size.
• Variable‑cost escalation (e.g., overtime wages, premium material prices) when capacity is stretched.

8. Break‑Even Analysis

The break‑even point (BEP) is the output level where total revenue equals total cost.

$$ \text{BEP (units)} = \frac{FC}{P - v} $$ where P = selling price per unit, v = variable cost per unit.

Worked example

Parameter	Value
Fixed Costs (FC)	£12 000
Variable Cost per unit (v)	£18
Selling Price per unit (P)	£30

\[ \text{BEP}= \frac{12\,000}{30-18}= \frac{12\,000}{12}=1\,000\ \text{units} \] The firm must sell at least 1 000 units to cover all costs. Production beyond this point contributes to profit, and the unit‑cost curve begins to flatten as economies of scale are realised.

9. Marginal Cost and Decision‑Making

Marginal Cost (MC) is the extra cost of producing one additional unit:

$$ MC = \frac{\Delta TC}{\Delta Q} $$

If MC < (Price – Variable Cost), increasing output reduces average cost and raises profit. Designers use MC to judge whether a design change (e.g., adding a feature) is economically viable at the intended production scale.

10. Illustrative Cost‑Scale Table

Output (units)	Fixed Cost (£)	Variable Cost per unit (£)	Total Cost (£)	Unit Cost (£/unit)	Trend comment
100	10 000	20	12 000	120	High – FC dominates
500	10 000	20	20 000	40	Sharp fall – economies of scale
1 000	10 000	20	30 000	30	Continued fall, slower
2 000	10 000	20	50 000	25	Approaching minimum
5 000	10 000	20	110 000	22	Flattening – near optimum
10 000	10 000	22	230 000	23	Rise – early diseconomies (VC ↑ due to overtime & material premium)

11. Interpreting the Unit‑Cost Curve

A typical U‑shaped unit‑cost curve is plotted with Unit Cost (£/unit) on the vertical axis and Output (Q) on the horizontal axis.

• Downward‑sloping segment – economies of scale; fixed‑cost component falls.
• Lowest point – optimal scale where average cost is minimum.
• Upward‑sloping segment – diseconomies of scale; variable costs rise (e.g., overtime, equipment wear).
• Mark the break‑even point on the horizontal axis and draw a marginal‑cost line intersecting the price line to show profit‑maximising output.

Suggested diagram: a single curve labelled “Unit Cost”, with arrows indicating “Economies of Scale” (left side) and “Diseconomies of Scale” (right side), and points for “Optimal Scale” and “Break‑Even Quantity”.

12. Practical Implications for Designers

1. Define target volume early – informs material choice, process selection, tooling investment and TQM planning.
2. Choose scalable processes – e.g., injection moulding for >10 000 units, CNC machining for 1 000–5 000 units, 3‑D printing for low‑volume customisation.
3. Design for modularity – allows the same core product to be sold in different configurations without re‑tooling.
4. Factor learning‑curve benefits – anticipate a 10 % reduction in labour time each time cumulative output doubles.
5. Integrate cost data into CAD/CAE tools – many packages estimate material usage and machining time, feeding directly into cost models.
6. Apply Total Quality Management (TQM) – systematic quality control reduces re‑work, thereby limiting variable‑cost escalation at high volumes.

13. Summary

The commercial context of a product—from its life‑cycle stage to the chosen market segment and marketing mix—determines the scale at which it should be produced. Understanding fixed and variable costs, economies and diseconomies of scale, break‑even analysis, marginal cost, learning‑curve effects and economies of scope equips designers and managers to make informed decisions that balance profitability with customer value.