Describe Two Activities Inside Your Organization Or One Insi

Describe Two Activities Inside Your Organization Or One Inside And

1. Describe two activities inside your organization, or one inside and one 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.

2. 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.

Paper For Above instruction

In this analysis, I will explore two activities within a hypothetical manufacturing organization to illustrate the concepts of economies and diseconomies of scope, as well as examine a specific pricing decision to assess its optimization and potential profit implications.

Activities Exhibiting Economies of Scope

Within the organization, one activity involves the production of electronic components, while another involves the assembly of electronic devices. These activities exhibit economies of scope because they share common resources, technologies, and distribution channels. The primary source of scope economies here is shared expertise and infrastructure; manufacturing electronic components and assembling finished products utilize overlapping machinery, skilled labor, and suppliers, reducing overall costs compared to if these activities were conducted separately.

The organization could leverage this scope economy by integrating both activities into a vertical or horizontal scope, thereby consolidating operations and procurement processes. For example, investing in shared manufacturing facilities or cross-training employees to perform multiple tasks enhances flexibility and reduces per-unit costs. Economically, if prior per-unit costs for separate activities were $50 and $70 respectively, and scope economies reduce combined per-unit costs to $90 from $120, the profit margin per unit increases significantly.

Calculating profit consequences: assume a demand of 10,000 units and a selling price of $150 per unit. Prior combined costs were $120 per unit, leading to a gross profit of ($150 - $120) 10,000 = $300,000. With scope economies, costs decrease to $90 per unit, leading to gross profits of ($150 - $90) 10,000 = $600,000. Thus, exploiting scope economies could double gross profit, representing a substantial profit increase of $300,000.

Activities Exhibiting Diseconomies of Scope

Conversely, diseconomies of scope can occur when activities become too diversified, exerting managerial strain and diluting focus. For example, the organization also ventures into unrelated sectors like consumer finance, which requires different expertise, regulatory compliance, and customer engagement strategies. The source of diseconomies here stems from increased complexity, coordination costs, and managerial inefficiencies, leading to rising average costs and reduced profitability.

To exploit or mitigate diseconomies of scope, the organization might consider divesting or focusing on core competencies. For instance, discontinuing operations in the consumer finance sector could allow reallocation of resources to more profitable activities, lowering costs and increasing overall profitability. If the diversification initially resulted in an average cost increase from $50 to $70 per unit, reducing scope might bring costs back down to $50, improving profit margins accordingly.

Pricing Decision Evaluation

A specific pricing decision involved launching a new electronic device at a price point of $200, based on competitor analysis and targeted profit margins. Initially, the company set the price assuming a unit cost of $150, aiming for a 33% profit margin. However, post-launch, market feedback indicated higher price sensitivity, and sales volume was below projections. The firm missed an opportunity for greater profit through optimal pricing strategies.

Upon reassessment, the company could consider lowering the price to $180 to stimulate demand, provided the costs remain at $150. This adjustment could increase sales volume, thereby boosting total profits. Assuming demand increases by 20% with the price reduction, the new sales volume would be 12,000 units, with a profit per unit of $30 ($180 - $150). Therefore, total profits would be 12,000 $30 = $360,000, compared to the initial profit of 10,000 $50 = $500,000 at the original price, which was higher but hampered by lower sales volume.The analysis indicates that price optimization, considering demand elasticity, is crucial to maximizing profit rather than relying solely on unit margins.

Conclusion

Understanding and leveraging economies of scope can significantly enhance organizational profitability, but it requires careful assessment to avoid diseconomies caused by over-diversification. Additionally, strategic pricing decisions must incorporate market responses and demand elasticity projections to optimize profits. Both factors—scope economies and pricing strategies—are interdependent and vital for sustainable business growth.

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