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Economies of Scale in Plant Construction Capital Operating Capacity Expenditure CapEx Scale Unit Operating Scale Expansion (Units) (CapEx) CapEx/ Unit Economies Cost Economies 100 $35,000 $350 $50 150 $45,000 $300 -14% $45 -10% 300 $75,000 $250 -29% $40 -20% The above Cost of Plant Construction demonstrates significant 'economies of scale' Economies of scale, enjoying a lower unit cost for a larger scale operation or investment, is common. Notice how the Capex/Unit declines from $350 to $250 as the number of units of capacity added increases. Furthermore the Unit Operating Cost declines from $50 to $40 as the number of units of capacity added increases. Software development affords the ultimate level of economies of scale as once software is developed there is absolutely no additional cost for additional use. This is true for all intellectual property including entertainment content and is almost valid for pharmaceutical and other medical technologies. The model permits users to select the size of Capacity Expansion in Units Capacity Expansion (Units) 150 Write a formula using an IF (conditional) function in the green box below that selects the unit cost based on the Capacity Expansion above. Unit Operating Cost Hint : If you hard code the Unit Operating Cost of $45 related to Capacity Expansion of 150 Units downstream questions will be graded as incorrect. Write formulas in row 102 such that in every year prior to a year in which adequate capacity would not otherwise exist capacity is expanded by the quantity selected in D91. Note : Additional Capacity becomes available in the year after the investment is made. Calculate the Incremental Unit Sales as the Company's Unit Sales minus the Capacity Constrained Unit Sales. 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Capacity 500 500 500 500 500 500 500 500 500 500 500 Capacity Expansion (Units) Cumulative Additional Capacity 0 0 0 0 0 0 0 0 Incremental Unit Sales Product A Product B Company Financial Model The existing plant has a Unit Operating Cost of $60. The plan is to fully load any new plant because of its lower operating cost and to utilize the existing plant to manufacture the balance. The price of Product A is $110 and the price of Product B is $100. The Incremental Gross Profit is the Incremental Unit Sales multiplied by the Unit Gross Profit The average Unit Cost will depend on the: Size of plant constructed Mix of manufacturing done at the lower cost new plant rather than the higher cost existing plant