Question 1

What is true about a minimum efficient scale?

Accepted Answer

The minimum efficient scale (MES) is the lowest point on the cost curve at which a company can produce its goods at a competitive price. It represents the optimal quantity for a company to produce to minimize average costs.

Question 2

Fuchsia Corp., a retail chain, opens four outlets in different locations of a city.It markets itself for attracting customers to these locations.The company invests in promotional campaigns for one of the outlets and then divides the expenses among the four outlets.Which of the following is the subject of economies of scale in the described scenario?

Accepted Answer

The subject of economies of scale in this scenario is the advertising expenses. By dividing the promotional campaign expenses among the four outlets, Fuchsia Corp. is able to spread out the cost and potentially reduce the per-outlet cost of advertising. This is an example of economies of scale, where the cost per unit decreases as the number of units produced or distributed increases.

Question 3

Connections Communications Inc.has been able to achieve optimal efficiency by identifying a task for each employee and enabling them to become thoroughly proficient in their tasks.The company has realized that employees develop an expertise in their specified job profile over time and they gradually begin to work faster than when they started the job.This is an example of _____.

Accepted Answer

Employee specialization refers to the process where employees become experts in their specific job roles, leading to increased efficiency and productivity over time.

Question 4

Turbine Industries breaks down its manufacturing process into smaller segments that are performed by employees who are trained very well.This also helps the firm to save time because this way the employees do not need to juggle between various tasks.This scenario best illustrates _____.

Accepted Answer

The scenario best illustrates task specialization, which refers to dividing a larger task into smaller tasks and assigning them to employees who are trained well in those specific tasks. This helps to save time and improve efficiency. Minimum efficient scale and competitive parity are not relevant in this context, and employee specialization is too broad a term to accurately describe this scenario.

Question 5

Blaze Corp., a car company, shared its costs of producing cars.It did so by introducing the production of car accessories that are used by customers to upgrade or customize their cars.Blaze Corp.started selling car accessories such as engine oils, wheels, and music player and thus shared its market research costs between cars and car accessories.This led to a definite decrease in the overall cost of production.This scenario best illustrates _____.

Accepted Answer

The scenario best illustrates economies of scope as Blaze Corp. has expanded its production to include car accessories and can share its market research costs between cars and car accessories, thus reducing the overall cost of production.

Question 6

DFN Inc.expanded its manufacturing plant to employ more equipment because the management of the company thought this would help them attain more sales.Unfortunately, this affected the cost of each unit produced because the company invested more finances for better equipment.This also led to a decrease in sales as customers were not willing to buy the product for an increased price.This scenario best illustrates _____.

Accepted Answer

This scenario best illustrates diseconomies of scale, which occur when a company expands its production beyond a certain point, leading to increased costs per unit and a decrease in sales. This is often due to inefficient use of resources, such as overinvesting in equipment, as seen in this case.

Question 7

A reduction in costs per unit due to increases in efficiency of production as the number of goods being produced increases best defines the term _____.

Accepted Answer

Economies of scale refer to the decrease in costs per unit as production increases, due to increased efficiency in production. This is often achieved through specialisation, division of labour, and the ability to purchase raw materials and supplies at lower costs due to larger order quantities.

Question 8

The expenses and taxes that are directly related to the wide-ranging operation of a company best define the term _____.

Accepted Answer

General and administrative costs refer to the expenses and taxes that are directly related to the wide-ranging operation of a company, such as salaries of employees, rent, utilities, insurance, and other overhead expenses. Sunk costs refer to expenses that have already been incurred and cannot be recovered, research and development costs refer to expenses related to creating new products or improving existing ones, and incentives and promotional costs refer to expenses related to advertising, marketing, and sales promotions.

Question 9

Which of the following statements is true of a company's general and administrative costs (G&A)?

Accepted Answer

General and administrative costs (G&A) include expenses such as management salaries, legal fees, rent, utilities, and office expenses, which do not directly contribute to the production of goods or services. They are important for a company with a high sales volume that wants to create cost advantage by managing its G&A across more units. Research and Development (R&D) expenses are typically separated from G&A and are considered part of a company's operating expenses. Therefore, option C is incorrect. Option A and B are also incorrect as G&A costs are not part of production costs and do not exclude operating expenses respectively.

Question 10

Taurus Inc.usually produces 5,000 handcrafted products in a day.Recently, the demand for handcrafted products drastically increased as one of its products became a popular item for home décor.Due to this increase, the company had to up its production level to 10,000 products per day.This, however, decreased the price of individual products.This scenario best illustrates _____.

Accepted Answer

The scenario illustrates economies of scale, as the company had to increase production to meet the increased demand, resulting in a decrease in the price of individual products.

Question 11

The Finance Department of Neptune Industries has to audit expenses and profits made each year.It creates separate databases for costs accrued in the form of equipment used in the company and for other costs such as costs of accounting, rent, and managerial salaries.Which of the following is the subject of economies of scale in the described scenario?

Accepted Answer

General and administrative costs, which include accounting, rent, and managerial salaries, are the subject of economies of scale in the described scenario. This is because these costs can be spread out over a larger volume of production, resulting in lower costs per unit produced. Research and development expenses, incentives and promotional costs, and advertising expenses are not mentioned as relevant to the described scenario.

Question 12

Breaking a large process into smaller elements that require specialized knowledge is known as _____.

Accepted Answer

Task specialization involves breaking a large process into smaller elements that require specialized knowledge. This allows for more efficient and effective completion of the overall process. Professional specialization and employee specialization refer more to the overall skills and expertise of an individual or group, while process specialization is not a commonly used term in this context.

Question 13

Nirvana Publishing House invested in high-end printing equipment.After a year of production, the company had to double the amount of production of its newspapers and weekly magazine because of high customer demand.However, the company did not have to invest in another similar equipment to meet demands.This is an example of a _____.

Accepted Answer

Fixed costs of production are costs that do not change with the level of output. In this case, the cost of the high-end printing equipment remains the same regardless of the increase in production volume.

Question 14

Which of the following is a feature of task specialization?

Accepted Answer

Task specialization allows workers to focus on specific tasks, increasing efficiency and reducing time lost in switching between different activities.

Question 15

Attire Corp., a garment manufacturing company, explains to its employees why its previous year's sales had not met the required standards.The management uses a diagram of the cost acquired for each item manufactured against the volume of items produced in a particular period of time.The pictorial representation is an example of the _____.

Accepted Answer

The answer of Attire Corp., a garment manufacturing company, explains...

Question 16

MediDose Inc., a pharmaceutical company, has been studying and experimenting with a few drugs.After 10 years of conducting and standardizing tests, the company comes up with positive results that would help many patients.These drugs become popular and effective among millions of patients and enable the company to expand its operations across the globe while spreading out the cost of the studies.Which of the following is the subject of economies of scale in the described scenario?

Accepted Answer

Research and development expenses are spread out as the drugs become popular and effective, demonstrating economies of scale in the scenario described.

Question 17

Which of the following is a primary characteristic of employing automated equipment in a company with high levels of production?

Accepted Answer

Automated equipment can increase production efficiency and reduce per-unit cost of production for large companies with high levels of production. This is because the initial fixed cost of acquiring and installing the equipment can be spread out over a larger number of units produced, resulting in lower per-unit costs over time.

Question 18

The increased efficiency that results when employees perform a narrow range of tasks over and over again leading them to acquire specialized knowledge that helps them complete the task more efficiently accurately defines the term _____.

Accepted Answer

The answer of The increased efficiency that results when employees...

Question 19

The relatively fixed costs such as the costs of plant and equipment, which do not increase with an increase in the number of units manufactured, are known as _____.

Accepted Answer

Fixed costs are expenses that do not change with changes in the level of production or sales volume, such as the cost of plant and equipment.

Question 20

Which of the following statements is true of research and development (R&D)?

Accepted Answer

B) The higher a firm's R&D costs, the more the scope for the company to expand globally allowing costs to be spread across more customers. This is true because significant investment in R&D can lead to innovations and improvements that make a company's products or services more competitive on a global scale. This, in turn, can increase the customer base over which the R&D costs are spread, potentially reducing the per-unit cost and enhancing the company's competitive position.

Quiz 4: Cost Advantage