DECA+ Business Management and Administration Practice Exam

Which method describes a company’s ability to benefit from lower average costs through larger production scales?

1. Skimming

2. Lockout

3. Flighting Strategy

4. Law of Economies of Scale

The correct answer is: Law of Economies of Scale

The ability of a company to benefit from lower average costs through larger production scales is known as the Law of Economies of Scale. This principle suggests that as production increases, the fixed costs can be spread over more units of output, leading to a decrease in the average cost per unit. As companies expand their production, they often become more efficient in their processes, negotiate better terms with suppliers due to bulk purchasing, and utilize more sophisticated production techniques. These efficiencies contribute to overall cost savings, which can provide a competitive edge in pricing and profitability. The other options do not relate to this concept. Skimming refers to setting a high initial price for a product and gradually lowering it, while lockout is typically associated with labor disputes and union negotiations. A flighting strategy involves alternating periods of advertising and inactivity and does not pertain to production scale or cost management. Thus, the Law of Economies of Scale is the most appropriate term for describing the cost advantages gained from increased production.