Question

The claims processing office of an insurance company is planning to double the square footage of its office space gradually over the next five years. Its cost accountants are forecasting that by doing so the average total cost per claim processed will decline from $50 per claim today to $35 per claim five years hence. Can we say that this insurance company’s claims office has economies of scale, diseconomies of scale or neither in “producing” processed claims and why is this the case?

Answer 1

Economies of scale are cost benefits reaped by firms when production becomes effectual. Firms can obtain economies of scale by augmenting production & lessening costs. This occurs because expenses are spread over a bigger quantity of goods. Costs can be both variable costs & fixed costs.

The magnitude of the business is usually relevant when it comes to economies of scale. The bigger the scale of business, the greater the cost savings.

Economies of scale can be both external & internal. Internal economies of scale are based upon managerial decision-making, whilst external ones have to do with outside determinants.

Economies of scale are an essential concept for any corporation in any sector & denote the cost-savings & competitive advantages bigger firms have over smaller ones.

Most customers do not comprehend why a smaller firm charges more for an identical good sold by a bigger firm. That is because the cost per unit depends upon how much the firm produces. Larger firms are able to manufacture more by spreading the cost of production over a larger quantity of products. A sector may dictate the commodity's cost if there’re a number of different firms manufacturing similar products within that sector.

There’re many reasons as to why economies of scale give rise to lesser per-unit expenditures. Firstly, specialization of labor & more integrated technique boost manufacturing volumes. Secondly, lesser per-unit expenditures can come from the bulk orders from the vendors/ bigger advertising purchases/ lower cost of capital. Thirdly, spreading internal function expenses across greater units produced & sold aids to lessen costs.

Internal operations include accounting, marketing & information technology. The first 2 reasons are also considered operational efficacies & synergies. The second 2 reasons are cited as advantages of M&As.