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Economic Size of an Industrial Unit

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The profitability & efficiency of the business unit largely depends on its size. The decision about the size of the unit is the most basic & strategic one. The size of the business unit refers to the scale of its operation. It can be kept large from the beginning or increased during the course of time.

Standard of measuring the size:

The plant or the facility may be large or small depending on various factors such as:
  • Net worth: It represents the owner’s contribution in total investments which includes paid up capital & accumulated reserves & surpluses.
  • Size of the assets: It includes the break up of the fixed assets & current assets.
  • Employment: Under this aspect the total number of workers employed is taken into account. Generally larger firms employ more workers.
  • Consumption of raw materials: The value of raw materials used is considered under this criterion.
  • Consumption of power: The power usage is very high in larger facilities as compared to smaller ones.
  • Volume of output: Under this measure, the total number of units produced during the year is taken into account. For assembly line productions, this standard can be used effectively.
  • Production capacity: The output in proportion to the machinery & labour is considered while measuring the production capacity of a unit.
Factors affecting the size of a unit:

The optimum size of an industrial unit or a firm is determined by different factors, such as

Technical factors: In a large scale unit more technical advantages are possible since the labour & machinery can be divided to maximum & effective use. So the idle capacity is reduced to minimum.

Managerial factors: A large unit can afford to divide the managerial functions into various sections and departments like production, purchase, sale, financing, accounting, legal etc. this ensures proper handling of resources & lesser wastage.

Financial factors: Larger units have have more financial advantages than smaller ones. They have a better credit standing and they can raise funds easily & economically. They have huge assets due to which they are better financially positioned & banks can support them by providing working capital.

Marketing factors: Larger firms can tap certain economic areas which are attached to bulk buying and selling. They are at an advantage because the have more resources regarding transportation, employing advertising and marketing firms for more exposure.

Risk factors: There will always exist a risk of demand fluctuation depending on the state of the economy. There will be periods of boom & recession. This business risk is bigger in larger facilities. Since they involve huge investment in assets and long term commitments, the risk is always bigger.

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