Economies of scale are usually associated with the

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Cornerstones of Cost Management
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Chapter 20 / Exercise 10
Cornerstones of Cost Management
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2. Economies of scale are usually associated with the spreading of fixed costs, such as when a manufacturer builds a factory. But the spreading of fixed costs is also important for
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Cornerstones of Cost Management
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Chapter 20 / Exercise 10
Cornerstones of Cost Management
Hansen/Mowen
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economies of scale associated with marketing, R&D, and purchasing. Explain.
3 . What is the difference between economies of scale and learning economies? If a larger firm has lower average costs, can you conclude that it benefits from economies of scale? Would a small firm necessarily enjoy the same cost position if it were to duplicate the size of its larger rival ?
4. A firm contemplating entering the market would need to invest $100 million to build a mini- mum efficient scale production plant (or about $10 million annually on an amortized basis). Such a plant could produce about 100 million pounds of cereal per year. What would be the av- erage fixed costs of this plant if it ran at capacity? Each year, U.S. breakfast cereal makers sell about 3 billion pounds of cereal. What would be the average fixed costs if the cereal maker cap- tured a 2 percent market share? What would be the disadvantage if it achieved only a 1 percent share? If prior to entering the market, the firm contemplates achieving only a 1 percent share, is it doomed to such a large cost disparity?

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