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Analyse the steps towards cost leadership within the production relationship of a modern firm. Be specific and offer some examples - Essay Example

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In this sense, economies of scale result when fixed costs are spread over more and more units of production, resulting in a lower total cost per unit. To…
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Analyse the steps towards cost leadership within the production relationship of a modern firm. Be specific and offer some examples

For other industries, it is possible to attain economies of scale when the increased volume enables the assignment of resources more efficiently. This is particularly true of costs associated with manpower specialisation, where an increase in volume allows for individuals to be assigned specialised tasks, thus streamlining production methods. This results in improving rate of production without increasing the number of workers. Thus, increasing economies of scale occurs when the marginal increase in a factor of production is less than the marginal increase in the corresponding quantity of products produced.
Economies of scope is similar to economies of scale because it aims to increase production faster than the attendant increase in costs. The difference lies in the number of products by which to attain this. Economies of scope seeks to reduce per unit total cost by diversifying the products a firm makes and sells. By increasing the number of product lines and extending the use of inputs (manpower and machinery) over the alternative products, the overall cost per unit of each product line is reduced because of the sharing of fixed costs among the product lines. For instance, Dunkin Donuts’ main product line is its number of variously flavoured donuts; somewhere along the line the firm decided to produce Munchkins, the bite-sized versions of the same flavours as the donuts, they tapped a new type of market demand which preferred the smaller versions. From the production aspect, the same machines and manpower were used to make the new product, thus spreading fixed costs over two product lines. Thus, increasing economies of scope occurs when the sum of the marginal increases in the cost of producing one additional unit in all the product lines is less than the increase in the marginal cost of each product line taken ... Read More
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