Marketing: Marketing and Variable Costs Essay

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Chapter 7 Notes- Joy Pak 1) What is meant by economy of scale? What are the four ways and give examples. Explain diseconomies of scale.
Economy of Scale
-bigger you are, lower the production cost
-buy in bulk, less equipment cost
-the more products a company makes, the lower the production costs for each individual product

1. Developing Products for Private-Label Companies
-same product for the brands, just price is different
-only cost to manufacturer is variable costs, high costs are the fixed costs but manufacturer already reached the break-even point so fixed costs have all been paid
-store gets low priced product to sell, the manufacturer makes a considerable profit
-Ex. PC does not make the product, they get it from Green Giant, this increased the size of company and contracts are made from the labels

2. Creating a Barrier to Entry for Competitors
-keep away and discourage your competitors
-company are tempted to keep price high to reach breakeven point, but this fails because competitors can enter market with lower price
-marketer should follow the principle of economy of scale, and will price product at lower price to stimulate sales, which reduces fixed costs

3. Creating New Brands
- what company makes can be used for other products
-company can use the labour and machinery to expand the product line to increase sales without increasing fixed cots
-this is a great way to increase profit
-Ex. Tim Horton’s expanded their products such as creating sandwiches, soups.

4. Merging with Competitors
-buy your competition which leads you to become better
-results in reduction of fixed costs because all the marketing of both companies is combined, which leads the business to operate more efficiently and effectively
-greater efficiency =fewer employees = lower operating costs
-However, fewer employees = negative impact on public perceptions= lower consumer confidence= decrease sales

Diseconomies of Scale
-sometimes companies get so big that they don’t have control
-expansion can create more profit, but some businesses can lose their touch with the branch plants, employees, and markets
-combing facilities and machinery become over used and breaks down
-layoffs and downsizing employees lead to poor labour relations, and remaining employees must do extra work which can cause them to lose the sense of security
-communication channels can become inefficient and lead to duplication of effort and reduce efficiency
-entering another market will lead to high competition causing labour shortages and increasing property values
-Ex. Loh Brothers Ice Cream was a small shop and was homemade with exotic flavours but as the company expanded it used machinery and factories and was not as good because it wasn’t handmade. This made Loh Brothers Ice Cream become diseconomies of scale.

2. Define the terms and give examples

Overhead
-used to set the environment (light, heating, rent for building)
-costs connected to operation but not directly involved

Fixed Cost
-cost that needs to be paid no matter what even if you don’t have a single customer or sell a single product
-as company gets bigger, then costs are dependent on sales

Variable Costs
-directly related to what you’re doing to the operation of your business, it can change as you do your business
-costs that can go up or down depending on the amount of product made or services provided
-try to control by making a budget since it enables a business to establish fixed costs for the purpose of calculating the break-even point
-Ex. If a restaurant has 20 tables, if it increases you have to hire more labour, and the more you sell the greater per unit

Indirect Costs
-costs that are not connected to what you’re doing
-Ex. Cafeteria staff, janitor, principal

Direct Costs
-costs that are connected to what you’re doing
-Ex. Teacher, whiteboard

Start Up Costs
-the costs that occur in creating a business
-first starts negative
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