Cost benefits from producing a greater variety of goods Show
What are Economies of Scope?Economies of scope is an economic concept that refers to the decrease in the total cost of production when a range of products are produced together rather than separately.  Formula for Economies of ScopeWhere:
Example of Economies of ScopeFor example, a restaurant produces both hamburgers and sandwiches. The cost of separately producing 1,000,000 hamburgers is $0.50 each. Likewise, if 4,000,000 sandwiches are produced separately, the cost is $0.30 each. If 1,000,000 hamburgers and 4,000,000 sandwiches are produced together (by using the same preparation and storage facility), the total cost is $1,500,000. To determine the economies of scope:
($500,000 + $1,200,000 – $1,500,000) / $1,500,000 = 13.33%. Therefore, the cost of producing hamburgers and sandwiches together is 13.33% less than the cost of producing them separately. How to Achieve Economies of Scope?1. Flexible ManufacturingFlexible manufacturing exists if multiple products can be produced using the same manufacturing systems and inputs – for example, using the same preparation and storage facilities when making hamburgers and fries, as opposed to using two separate facilities. 2. Related DiversificationIf a company is able to use its operational expertise, resources, and capabilities across its organization, then it can take advantage of related diversification. For example, hiring designers and marketers who can use their skills across different product lines allows for the production of a wide range of products. 3. MergersMergers often enable a company to share research and development expenses to reduce costs and diversify its product portfolio or knowledge. For example, two pharmaceutical companies might merge to combine their research and development expenses to create new products. Economies of Scope vs. Economies of ScaleEconomies of scope are often confused with economies of scale. The former refers to the decrease in the average total cost of production when there is an increasing variety of goods produced. On the other hand, economies of scale refer to the cost savings achieved from increasing the scale of production of a single good. Economies of scope: Savings in cost due to the increased production of distinct products using the same operations. Economies of scope reduce the average cost of producing multiple products. Economies of scale: Savings in cost due to the increased production of the same product. Economies of scale reduce the average cost of producing one product. The Importance of Economies of ScopeEconomies of scope allow a company to gain efficiency from producing a larger variety of products. A company is able to sell a greater range of products and also respond to changes in consumer preferences. It reduces risks for a company by allowing for related diversification. If a major car producer only produced SUVs, the company would be vulnerable to market changes (if, for example, oil price spikes and consumers switch to buying more eco-friendly cars). Related ReadingsTo learn more and advance your career, see the following free CFI resources:
What is economies of scope in economics?Economies of scope is an economic principle in which a business's unit cost to produce a product will decline as the variety of its products increases. In other words, the more different-but-similar goods you produce, the lower the total cost to produce each one will be.
What is economies of scope example?A company that benefits from economies of scope has lower average costs because costs are spread over a variety of products. For example, it is much easier for a restaurant chain to offer new dishes than to start a new restaurant chain offering the same new foods.
How the economies of scope are measured?Formula for Economies of Scope
C(qa+qb) is the cost of producing quantities qa and qb together. Economies of Scope (S) is the percentage cost saving when the goods are produced together. Therefore, S would be greater than 0 when economies of scope exist.
What are economies of scope How are synergies achieved?How does it Work? Economies of scope can be achieved by producing various products together or offering similar services in one package. Doing this decreases the total cost of production. You can calculate it by adding Direct Material cost, Direct Labor Cost, & Manufacturing Overhead Cost.
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Economies of scope refers to the decrease in average total cost that can occur when a firm
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