1 Activity 2 Jih-Yang Tsai University of the Cumberlands Dr. Iddisah Sulemana July 10th, 2021 2 Describe two activities inside your organization, or one inside and outside your organization, that exhibit economies (or diseconomies) of scope. Describe the source of the scope economies. How could your organization exploit the scope economy or diseconomy? Compute the profit consequences of the advice. When the founder first started the organization, we conduct engineering consulting services. For example, generating reports, engineering drawings, providing advice regarding repair, historical house restoration, new constructions, and renovations are included in our dayto-day jobs. We will print out all the engineering drawings for the owner, contractor or architect to pick up for different purposes. The printouts will generally be three sets, one for the owner, one for the construction team, and one for the governor to inspect if the project complies with the building code and the drawings. The scale of the project varies a lot. It can be a one-sheet drawing with some general notes and structural instructions. Or, sometimes, the printout could be 80 pages for just one set. That means 240 sheets of 24”W x 36”L paper, weighing almost 40 pounds. Initially, the company only has six people and had an old printer that can barely handle the printing job. One day, the president decided to replace the old printer with a new one as the company has grown more than two times, having 13 employees. The printing job has grown as the company size increases, too. The brand-new printer costs $550/month to lease compared to the old one with 150$/month. The company is actually earning more and with peace of mind with a newer printer while it costs more to lease. In this case, our company has higher demand that the older printer couldn’t afford. The newer printer realized economies of scale by ordering higher supply from it (Froeb et al., 2017). 3 Another example of economies scope is designing an apartment complex. Apartments are highly repetitive in terms of structural design. We usually design one or two major units and copy, paste the rest. If there’s some slight difference between each unit, we can just tweak the detail. In this case, the cost of designing eight apartment buildings with a bunch of copy/paste is obviously lower than design eight buildings separately. Cost(building 1-4, building 5-8) < Cost(building 1-4)+Cost(building 5-8) Thus, economies of scope is realized in the apartment complex design (Froeb et al., 2017). To exploit economies of scope better, for example, we can order a larger batch of printing papers from the paper company. Suppose we need 100 rolls of paper every month; we can order 200 rolls every two months to save shipping costs. We can also apply this same method to other office supplies to realize economies of scope. Another approach to realize the economies of scope is to contract with a specific architect firm by regularly attaining new projects. We can save energy and time communicating with new clients and possibly get turned down after receiving our quote. Saving time and energy in this aspect will have more resources to focus on other projects and be more profitable. - Describe a pricing decision your company has made. Was it optimal? If not, why not? How would you adjust price? Compute the profit consequences of the change. One time I was assigned to have a meeting at the job site with the architect and the homeowner. The house was built in the 1890s and is located in the city’s historical area. The house was in terrible shape. Since it’s in the historical zone, we need to preserve the appearance of the house unless it is beyond repair. It probably will take me more than 24 hours to finish the 4 repair, plus a couple of more site inspections. According to the president, my hourly rate is $150, which will be $3,600, plus, maybe two site visits, $450. The cost of design this project will be roughly $4,000. This type of restoration is hard to be through, it needs more energy and responsibility. The time I spend on this project could be replaced with other new construction or more straightforward additions. In other words, designing this restoration project will occupy my production capacity without extra reward. According to Hiriyappa, B. (2009), wage structure is a major influence to individual behavior that satisfies various requirement of individual person. With this concept, taking this project is not the most efficient way to utilize my working hours. Hence, I quoted the homeowner for $6,000 to compensate for the higher energy and time requirements. There are plenty of other substitutes structural engineering companies to handle this job and make the demand more elastic (Froeb et al., 2017). The homeowner turned me down and turned to his next best alternative. 5 References Froeb, L. M., McCann, B. T., Ward, M. R., & S. (2017). Managerial Economics (MindTap Course List) (5th ed.). Cengage Learning. Hiriyappa, B. (2009). Organizational Behavior. New Age International.
