Fixed Cost Degression

Definition:

Fixed Cost Degression refers to the effect where a company's fixed costs are distributed over an increasing number of produced units, leading to lower unit costs. This principle is a key aspect of corporate finance, pricing strategies, and M&A, as it can significantly impact profitability.

Causes of Fixed Cost Degression:

• Higher Production Volume: The more units are produced, the more fixed costs (e.g., rent, salaries, machinery) are spread across total production.
• Operational Efficiency: Companies optimize processes and utilize fixed resources more effectively.
• Technological Advancements: Automation and improved infrastructure help reduce the proportion of fixed costs in total expenses.

Formula:

Fixed Cost per Unit = Total Fixed Costs / Number of Produced Units

Significance in the M&A Context:

Fixed cost degression is a key driver of mergers and acquisitions. By merging with other companies or expanding business operations, firms can achieve higher production volumes, lower unit costs, and ultimately enhance their competitiveness and profitability in the long run.