Skip to content
MarkSchemeMarkScheme
Sign up — no card

9609 · 9.1.2

Scale of operations — practice questions

Practice and worked examples for 9609 Scale of operations. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

National retailer merges with rival, doubling stores to 1,200. Unit costs fall 8% year one but rise 3% year three. Explain using economies and diseconomies.

Show solution outline

Year 1 economies: Bulk purchasing from suppliers (technical), single IT/ad campaign (marketing/financial), central warehousing.

Year 3 diseconomies: Integration chaos — duplicate HQs, conflicting cultures (7.2.4), slow decisions (7.1.2 tall hierarchy), demotivated staff fearing redundancy (2.2).

Evaluation: Merger theoretically sound for scale but management failed to capture synergies — need delayering and culture programme before further expansion.

Worked example 2

A furniture manufacturer, 'ComfyChairs Ltd', is considering expanding its production facility. Currently, it produces 50,000 chairs per year. Its annual fixed costs are $200,000 and the variable cost per chair is $10. The proposed expansion would increase output to 150,000 chairs per year. The new, larger factory would have annual fixed costs of $450,000. Due to bulk-buying raw materials, the variable cost per chair is expected to fall by 10%. Calculate the average cost per chair before and after the expansion and explain the result.

Show solution outline

The solution involves calculating the long-run average cost (LRAC) at two different scales of operation.

Step 1: Calculate the current average cost per chair.

  • Current Output = 50,000 chairs
  • Fixed Costs (FC) = $200,000
  • Variable Cost per unit (VC) = $10
  • Total Variable Cost (TVC) = Output × VC = 50,000 × $10 = $500,000
  • Total Cost (TC) = FC + TVC = $200,000 + $500,000 = $700,000
  • Current Average Cost (AC) = TC / Output = $700,000 / 50,000 = $14.00 per chair

Step 2: Calculate the average cost per chair after expansion.

  • New Output = 150,000 chairs
  • New Fixed Costs (FC) = $450,000
  • New Variable Cost per unit (VC) = $10 × (1 - 0.10) = $9
  • New Total Variable Cost (TVC) = 150,000 × $9 = $1,350,000
  • New Total Cost (TC) = $450,000 + $1,350,000 = $1,800,000
  • New Average Cost (AC) = TC / Output = $1,800,000 / 150,000 = $12.00 per chair

Step 3: Conclusion and Explanation.

  • The average cost per chair falls from $14.00 to $12.00, a saving of $2.00 per unit.
  • This demonstrates economies of scale. The cost reduction is due to:
    • Purchasing economies: The firm secured a 10% discount on raw materials from buying in bulk, reducing the variable cost per unit.
    • Technical economies: Although total fixed costs increased, they did not triple with the tripled output. The more efficient, larger-scale machinery and facility spread these fixed costs over a much larger number of units, reducing the fixed cost per unit from $4 ($200k/50k) to $3 ($450k/150k).
Mark a 9609 question on this topicFull lessonOpen in course studio