Economies of scale
Economies of scale are the cost advantages companies from different industries enjoy due to expansion. Hudson City Bancorp, worth US$50 billion is one the oldest and largest banks in USA (DeCarlo, 2008). Sources of economies of scale for the bank include specialization of its workforce and its ability to invest in expensive advanced technology to increase efficiency of its operations. Moreover, the bank can spread advertising costs over large output thus; it can reach more customers and increase its market share.
Emcor Group is another large company enjoying economies of scale. The revenue of the Connecticut based construction company is estimated at $5.5 Billion (DeCarlo, 2008). The company enjoys greater discounts from buying materials in bulk over long-term contracts. Moreover, the company can borrow from financial institutions at lower interest rates.
Monsanto, worth US$10 billion in revenue is a leading company in agricultural biotechnology and production of chemicals (Decarlo, 2008). The company enjoys economies of scale by spreading its fixed costs over more output units. The company can also afford to invest in advanced machinery and technology devices. The company can also afford to have extensive specialization of its workforce to improve its quality of production.
Fixed vs. Variable costs
Costs of production to businesses fall under two categories, variable costs and fixed costs. Fixed costs are not dependent on output. They include rent, machinery and buildings. Variable costs vary with the output. The following is an analysis of Pfizer Inc.’s (one of the largest research-oriented pharmaceutical companies in the world) fixed and variable costs for the year 2010.
According to data from the company’s annual financial statement, the total Cost of operating activities amounted to US$32.5 billion in 2010 (Pfizer, 2011). Some of the company’s variable costs included advertising costs which amounted to US$ 4 billion and cost-reduction initiatives. Integration costs amounted to US$1 billion, restructuring charges (employee termination costs and asset impairment) amounted to US$1.125 Billion. Some of the fixed costs included salaries and wages which amounted to US$18.5 Billion, legal requirements and licensing came to $ 0.6 Billion, rents amounted to US$ 2.7Billion. The value of fixed costs is not affected output. It may be affected by policy changes on property such as land and buildings.
References
Decarlo, S. (2008). America’s Best big Companies. Retrieved from: http://www.forbes.com/2008/12/22/best-big-companies-biz-cz_sd_bigcompanies08_1222land.html
Pfizer (2010). Financial Report. Retrieved from:
http://www.pfizer.com/files/annualreport/2010/financial/financial2010.pdf
