Fluctuations in production levels can affect unit costs in several ways:
Economies of scale: Higher production volumes typically result in lower unit costs due to spreading fixed costs over a larger number of units.
Production inefficiencies: Lower production volumes may lead to underutilization of resources and higher per-unit costs.
Supply chain effects: Changes in production levels can influence the cost of raw materials, transportation, and other inputs, impacting unit costs.
Overhead allocation: Fixed overhead costs may become less efficient on a per-unit basis during periods of low production, leading to higher unit costs.