How could the scale of production affect average costs in the new factory?

• A. Output increases do not affect average costs.
• B. Fixed costs per unit rise as output increases.
• C. Efficiency never changes with scale.
• D. If output rises, fixed costs can be spread over more units, lowering average costs, though inefficiencies may appear if growth is too fast.

Answer: (D)

When production scales up, average cost per unit depends on how fixed and variable costs behave as output grows. Fixed costs—like the factory building and major machinery—don't change with quantity. So producing more units allows those fixed costs to be spread over more items, reducing the fixed-cost portion of the average cost per unit. Variable costs do rise with more production, but if there are economies of scale, the overall average cost can fall as output increases because the savings from spreading fixed costs outweigh the higher variable costs. However, expanding too quickly can create inefficiencies—coordination problems, maintenance overload, scheduling issues—that push costs back up and can limit or reverse the drop in average cost. This is why the described effect best captures how scale can influence average costs in a new factory.