Evaluating a Cost Reduction Strategy
A manufacturing firm's total cost structure is represented by a linear relationship. The firm incurs a total cost of $80,000 even when producing zero units. When production is at 50 units, the total cost is $800,000. A business consultant, after reviewing this cost structure, advises the firm's management: 'The cost to produce each additional unit is constant. Therefore, to lower your average cost per unit, your only option is to reduce the variable costs, for instance, by finding cheaper suppliers.'
Critically evaluate the consultant's advice. Is the consultant's reasoning entirely sound? Justify your answer by explaining a crucial factor related to the firm's cost structure that the consultant has overlooked.
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