Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBL Exams › Limitation to expand factory size
- This topic has 1 reply, 2 voices, and was last updated 12 months ago by Ken Garrett.
- March 24, 2022 at 12:41 pm #651807Noah098Member
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Hello sir, hope you are doing great.
I have a small question. If a factory gets surrounded by residential properties then it can’t be expanded, clearly. But does that mean economies of scale cannot be obtained at all? OR it will only mean that gains from economies of scale will be slower?March 25, 2022 at 7:27 am #651837Ken GarrettKeymaster
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It depends on whether the factory had any spare capacity.
Economies of scale are not obtained only from having a physically larger factory, but also whether production volume can be increased eg by redesigning production lines or running an extra shift.
Higher volumes will typically yield economies of scale on materials (larger purchase discounts) and making more use of the machinery (lower overhead absorption rates). A redesigned production line might allow larger batches to be produced.
Even if the existing factory is a full capacity, building a second some distance away would increase volumes thus opening the possibilities of purchase discounts and eg spreading R&D costs more thinly. However the economies of scale are not likely to be as great as operating a bigger factory at a single site. Mulit-site working usually introduces some inefficiencies.
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