Question

the decision about relocating manufacturing operations to the United States is so important, the board of directors at AutoEdge continues to systematically discuss every aspect of the situation.

The following week, CEO Lester Scholl meets you for coffee to discuss next week's board meeting.

"I'm hearing good things about you," he says. "Ingrid and George tell me you've been very responsive and helpful."

"That's good to hear," you say. "I've enjoyed working with them."

"We're both busy, so I'll get right to the point," he says. "One of the main objectives of any business is to be efficient. Without efficiency, the company is essentially losing money. Am I right?"

"Absolutely," you say.

"What must AutoEdge do," he says, "to obtain economies of scale with production? How do we know that it has achieved economies of scale? Conversely, how do we know if it is achieving diseconomies of scale?"

"That's a good question," you say. "I can understand why you ask."

But before you can respond, Lester's cell phone rings. After a minute, he ends the call and stands.

"I have to get back to the office to handle an emergency," he says. "Would you send me an e-mail with an answer to my questions, please?"

"No problem," you say. "I'll get it to you before I leave work this afternoon."

"I appreciate it," he says. "Thanks."

PLEASE USE DETAILS AND EXAMPLES ON HOW TO RESPOND TO THIS

Answer 1

Hi Lester,

I understand that efficiency and economies of scale are two most important concepts for any company to make more and more revenues and to increase bottom lines. Similarly, for our company as well we need to identify methods that uses minimal input but produces maximum and quality output and decrease cost of production and increase output or maximize output without which company might end up losing money as you rightly said.

I would suggest spending time with the on the floor and on the job labor along with the finance team to understand every detail of the cost that is involved in production. Even the overheads and administrative expenses like electricity bill, Telephone bill and every minor costs should be taken into consideration. I think our first success would be in doing so as we can average out the cost on individual units or output we produce and sell accordingly. This will drastically increase our company's efficiency.

Also, when we calculate the cost of production accurately, using mathematics we can calculate what would be the optimum output to produce for a minimal cost of production. Then, we can go on increasing unit by unit cost of production after reaching the optimum point to see whether the average cost of production of the total output is increasing or decreasing. If it is decreasing then there is still a long way to go to reach optimal cost of production and if it increases then that is the point beyond which dis-economies of scale starts. Thus, we can understand the economies and dis-economies of scale.

Regards,

XXXX.