Question

1. The JK Amish Corporation produces 1,200 wood cabinets and 600 wood desks per year, the total cost being $40,000. If the firm produced 1,200 wood cabinets only, the cost would be $28,000. If the firm produced 600 wood desks only, the cost would be $15,000.

a. Calculate the degree of economies of scope.

b. What % of cost savings exist? Where the cost-saving come from?

Answer 1

a) Total Cost of producing goods together = 40,000

Total Cost of producing goods separately = 28,000 + 15,000 = 43,000

The percentage cost saving when the goods are produced together (S) = [(43,000 - 40,000) / 40,000] * = 0.075 or 7.5%

Since S is greater than 0, it means economies of scope exist. The degree of economies of scope is 0.075.

b) The cost of producing wood cabinets and wood desks together is 7.5% less than the cost of producing them separately.

Cost savings can occur if the inputs required for both the products are same or by-products of the processes of one product can be used for producing another product.