Question

You overheard Mr. John, the newly-hired marketing manager, saying: “I think our company should take advantage of economies of scale by increasing output, thereby spreading out our overhead fixed costs”. Would you agree with this statement? If not, provide a better description for “economies of scale”. Explain how they may be achieved by organizations. Highlight what would prevent them to occur.

Answer 1

SOLUTION

ECONOMIES OF SCALE

"TAKING ADVANTAGES OF ECONOMIES OF SCALE BY INCREASING OUTPUT , THEREBY SPREADING OUT OVERHEAD FIXED COST "

When more units of good or services can be produced in a larger scale , yet with (on average ) fewer input costs , economics of scale is been achieved. Alternatively this means that the company grows and the production units are increased and also the company will have a better chance to decrease. Economics of scale have brought down the unit costs of production and have fed through to lower prices of consumers. Economies of scale is a key advantage for the company to grow. Companies can achieve economies of scale by increasing production and lowering cost. This happens because costs are spread over a large number of goods such as fixed and variable.

The size of the business generally matters when it generally comes to economies of scale. The larger the business, the more will be the cost savings. Larger companies are able to produce more by spreading by spreading the cost of production over the larger amount of goods. An industry may also be able to dictate the cost of product if there are number of different companies producing similar goods within the company.

Economics of cost are cost reductions that occur when companies increase production The fixed cost , like administration are being spread over more units of production. The larger the business, non profit , or government the lower will be the cost per unit . It represents the cost savings and competitive advantages larger business have smaller ones.

The economies of scale by increasing output, thereby increases the overhead fixed cost, and I strongly agree on the above statement, there is no need of any other description of economies of scale.

ECONOMIES OF SCALE BEING ACHIEVED IN ORGANIZATIONS

An economies of scale is achieved when increasing the scale of production decreases long - term average costs. In other words, the cost of production per unit decreases as a company produces more units. Reducing the cost per unit of production is the most significant advantage created by the companies.

Essentially, anytime you increase production and lower cost you probably increase economies of scale .

WAYS TO PREVENT ECONOMIES OF SCALE

Large producers are usually efficient at long runs of a product grades and find it costly to switch grades frequently. They will therefore avoid special grades even though they have special margins. Often smaller manufacturing facilities remain viable by changing a commodity grade to specialty products.  

Economies of scale often have limits, such as passing the optimum design where costs per additional unit begin to increase. Common limit for low cost per unit weight commodities is saturating the regional market, thus having to ship product uneconomic distances Other limits include less efficiently or having a higher defect rate.