CA Intermediate · Financial Management and Strategic Management · Strategic Analysis: Internal Environment
Sagar Pharma finds that its R&D spending per product is much lower than that of rivals, yet its drug launches are on schedule. Managers attribute this to experience gained as cumulative output has grown, which has lowered unit costs. Which concept explains this reduction in unit cost?
The experience curve effect explains it. As cumulative output grows, the firm learns, improves processes and spreads costs, so unit cost falls. This is different from product life cycle stages, diversification synergy or vertical integration, which do not describe cost decline from accumulated experience.
- AExperience curve effectCorrect
- BProduct life cycle decline
- CDiversification synergy
- DVertical integration
Explanation
Unit costs falling as cumulative output and learning increase is the experience curve effect. Product life cycle describes stages of demand, not cost learning. Diversification synergy and vertical integration are strategic choices, not explanations of cost decline from accumulated experience.
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