SELF TEST #28: Evaluate Economies of Scale in Each Cost Function
What are Economies of Scale?
Economies of Scale is the phenomenon where unit costs decline as the number of units sold increases.
Why do Economies of Scale exist?
Economies of Scale exist because the cost structure of an organization includes both variable and fixed costs. While the variable costs grow in proportion to the growth in units of Output, fixed costs do not. Fixed costs are stable over an expected range of production of Output. As a result, as a business grows, fixed costs do not grow as fast as the units of Output. This creates Economies of Scale.
What is the measure of Economies of Scale?
The measure of Economies of Scale is the change in the physical measure of Productivity, the ratio of physical Inputs/physical Outputs, over a period of time. The ratio of Inputs to Outputs should decline as the number of Outputs grows, due to the impact of the fixed costs in the cost structure. Another measure is the growth rte of physical Inputs compared to the growth rate of physical Outputs.
When is a functional cost department producing sustainable Economies of Scale?
A functional cost department is creating sustainable Economies of Scale if the growth rate in its Inputs, particularly People, grow slower than do the units of Output, but greater than zero.
What are Diseconomies of Scale?
Diseconomies of Scale occur when the units of Input in a functional cost department grow faster than the units of Output.
What are Super-economies of Scale?
Super-economies of Scale occur when the units of Input in the functional cost department shrink while the units of Output grow.
What is the likelihood that the industry market share leader will lead its industry in Return on Investment?
The likelihood that the industry market share leader will lead its industry in Returns on Investment is less than 30%.
What is design to value?
Design to value is an approach to managing costs by designing a product and its supporting cost structure only after the Performance and Price a customer requires have been established. Each benefit, and the cost incurred to provide it, is identified by the Company. The Company then designs its cost structure to stay within the target benefit cost.
Can an acquisition help create better Productivity and Economies of Scale?
If the Company is able to retain and grow the acquired customer relationships and reduce the numbers of Inputs, especially FTEs, of the combined firms, the acquisition should help.