Conceptual Understanding Of Term Economies Of Scope

Economies of scope

Economies of scope, it occurs when two product line sharing common input and with a little diversification in the other product line can lead to new revenue stream with a comparatively low cost. A company that diversifies its product line in many different markets can reduce its risk.

In simple way, the unit cost to produce a product will decline as the variety of products increases.

In other words, when two product sharing common raw material with just a slight change in the production techniques a new product line can be formed giving us a new revenue stream with low cost.

For example: -

11.    Newspaper, the main production happens in the night so whole day time the machines are left idle by just changing font size and paper outline we can produce pamphlet, visiting card magazines etc. that can give us a new product line which will earn more revenue with low cost.

22.   Suppose as a garment manufacturer one produces only for the men and women segment, so by adding children segment will increase the economies of scope because one can use same equipment, storage, supply and distribution channel to make new segment of goods. Which will further reduce the cost of production on all segment.