Optimum Size of a Business Unit – Optimum Firm

The optimum size of a Business Unit is a size where production is maximum at minimum cost.

Meaning of the Optimum Size

The Optimum Size of a business unit refers to such a unit that has all the factors of production in an ideal proportion such that, the factors of production are united in such a manner that maximum production is achieved at minimum cost. In other words, the profit earning capacity of a business unit is directly affected by its size. Therefore, the size of a unit should not be too big or too small. It should be of such a size, at which maximum production can be achieved, at minimum cost.

According to Prof. Hewett,

An Optimum sized industrial unit is that organization of business, which can produce its product at the minimum average cost in the market.

Factors Determining the Size of a Business Unit

At the start of a business, the businessman should keep in mind some requirements and facilities available while selecting the size of the business unit, but some economic and non-economic factors are such on which the businessman has no control: These factors also affect the optimum size of a business unit in numerous ways.

  1. Personal Ability of Entrepreneur

    The personal ability, efficiency, and experience of a businessman directly affect the business unit. If the businessman is experienced, skillful and courageous, the size of the business unit would certainly be big. Contrary to this, if an unskilled person is allowed to handle a big business unit, it will after some time become small due to losses, etc.

  2. Nature of the Produced Product

    The size of the business unit is also affected by the nature of the product produced in it. If the commodity is perishable, then it is impossible to take it to the markets far away, therefore such a unit would be small. For e.g., ice cream factory or ice factory, etc. On the other hand, the size of the unit producing imperishable commodities is comparatively big.

  3. Cost of Transport

    The expense of transportation also affects the size of a business unit. If the raw materials to produce goods must be arranged from a distant place and the finished goods also must be transported to other distant places for sale, then in such a case, a small business unit would be more appropriate. If it is not so, the cost of goods produced would increase, due to which such goods would be unable to cope with the competition of big markets.

  4. Government Control

    In 1951, the Government of India introduced the Industrial Development and Regulation Act, which stated that each business unit whose capital is more than one lakh rupees will be required to take permission from the government before starting its business. The government after its inspection may issue orders to contract or expand the size of the unit. Apart from this, those units or mills that release too much pollution are required to take permission from the Environmental Control Board. It issues orders from time to time for expansion or contraction of the business units.

  5. Localization and Early Start

    Localization and the ability to start early affect the size of a business unit. Localization refers to the easy availability of the raw material required in producing that product. If the required raw material, machines, tools, etc. are available in that area, no major problem arises in the establishment of that unit, and it can be started early. The unit established in this manner would be larger as compared to a unit established at a place, where such facilities are not available

  6. Competition

    The extent of competition in a business also affects the size of a business unit. In distinct kinds of professions, the degree of competition is different. At the time of the establishment of a business, the businessman must know the extent of competition in that business. The more the degree of competition, the bigger should be the size of the business unit then only it will prove to be more profitable because only a big unit can sustain losses arising from a high degree of competition. But if the size of the business entity is small, it will not be able to sustain such losses in the first few years of its establishment and consecutively it will close.

  7. Availability of Capital

    The availability of cash also affects the size of a business unit. If the businessman already has enough capital, then the size of the unit established by him would be big. That is why the size of a business unit established as a company is larger than the size of a sole proprietorship or a partnership firm.

  8. Value and Volume of Produced Product

    The size of an entity is also affected by the commodity being produced. Mostly, the units engaged in the business of diamonds, though have a large capital but are still small. Contrary to this, those business units engaged in manufacturing salt or cotton yarn may have a small capital but are comparatively bigger in size.

  9. Integration or Combination

    The size of a business unit is affected by the decision of two or more running business units to combine and work as one. Reasons for such integration can be many, like, to end competition between them or being able to sell their commodity at a higher rate to the public. Therefore, a new entity is formed, whose size is bigger than the earlier one.

  10. Product’s Demand in the Market

    If the demand for the produced commodity is local, then the size of a business unit would be small. After a certain limit, the extra production cannot be absorbed by the local markets. Whereas the business unit whose commodity’s demand is at the national or international level would be proportionately bigger. For example- a company is manufacturing Audio Cassettes in the Punjabi language only, would limit its demand in and near Punjab only. However, if produced in Hindi, the demand is in the whole of India, and if in English, then its demand would be in the whole of the world. Thus, based on the demand for a commodity, the size of a business unit increases or decreases.

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