Economy of scale refers to the characteristic that transportation cost per unit of weight decreases when the size of the shipment increases.
E.g. truckload shipments cost less per pound than less-than-truckload shipments. It is also generally true that larger capacity transportation vehicles such as rail or water are less expensive per unit of weight than smaller capacity vehicles like motor or air. Transportation economies of scale exist because fixed expenses associated with moving a load can be spread over the load’s weight. The fixed expenses include administrative costs of taking the order; time to position the vehicle for loading or unloading, invoicing and equipment cost. These costs are fixed because they do not vary with shipment volume.
E.g. suppose the cost to administer a shipment is $ 10.00. Then the 1-pound shipment has a per unit of weight cost of $10.00, while the 1,000 pound shipment has a per unit of weight cost of $0.01. Thus, it can be said that an economy of scale exists for the 1000-pound shipment.
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