Question

Manufacturing vehicles requires purchasing very expensive and sophisticated equipment as well as hiring many engineers. Your friend who works at the corporate headquarters of vehicle manufacturer Kneesawn lets you sit in on a meeting. At that meeting, the chief executives of Kneesawn debate whether or not to introduce a new model to its product line (a sports car tentatively called the Boikmobile). A Kneesawn VP provides two benefits for introducing the new model to its product line: (i) the company already has the robotics/factory/assembly line for manufacturing vehicles, so that introducing a new model will not require duplicating those costs, and (ii) the company already has a basic design for the engine/transmission/radiator/brakes under the hood that it could easily adapt to the Boikmobile.

• Which of the two benefits listed by the VP correspond to economies of scale and/or economies of scope? There may be overlap

Answer 1

Economies of scale refers to the savings a large company can enjoy from producing goods in high volume which a small company cannot . In this cost is reduced only by increasing volume of a single product . It is not about product diversification

Economies of scope refers to savings large companies enjoy from combining the marketing and distribution of different types of related products . It is technique to lower cost by producing multiple products with same operation and inputs . It is relatively new strategy .

So as per the definitions a new model is when introduced using same robotics , factory etc it is economies of scope . In the second case the same engine , transmission , radiator etc are produced in multiple volume as the new vehicle can adapt to these . So the second one is economies of scale . But we can say that same design is used to diversify so it is economies of scope also .

First one is economies of scope .

Second one is both .