Economies of Scale & Scope
1- The Blair Company’s three assembly plants are located in California, Georgia, and
New Jersey. Previously, the company purchased a major subassembly, which becomes
part of the final product, from an outside firm. Blair has decided to manufacture the
subassemblies within the company and must now consider whether to rent one
centrally located facility (e.g., in Missouri) where all the subassemblies would be
manufactured or to rent three separate facilities, each located near one of the
assembly plants, where each facility would manufacture only the subassemblies
needed for the nearby assembly plant. A single centrally located facility, with a
production capacity of 18,000 units per year, would have fixed costs of $900,000 per
year and a variable cost of $250 per unit. Three separate decentralized facilities, with
production capacities of 8,000, 6,000, and 4,000 units per year would have fixed costs
of $475,000, $425,000, and $400,000 respectively, but variable costs of only $225 per
unit, owing primarily to the reduction in shipping costs. The current production rates
at the three assembly plants are 6,000, 4,500, and 3,000 units respectively.
(a) Assuming that the current production rates are maintained at the three
assembly plants, which alternative should management select?
(b) If demand for the final product were to increase to production capacity, which
alternative would be more attractive?
(c) What additional information would be useful before making a decision?
2- Are economies of scale and/or scope important considerations for Toyota
company ? Explain why or why not.
Don't forget to consider "network economies" as well.
Is Toyota either vertically or horizontally integrated? Explain.
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