Chapter.4 Exam Questions Cost Advantage

Chapter 4: Cost Advantage

Multiple Choice Questions

1. A reduction in costs per unit due to increases in efficiency of production as the number of goods being produced increases best defines the term _____.

A. economies of scope

B. economies of finance

C. economies of scale

D. economies of wealth

Level of Difficulty: Easy

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Knowledge

AACSB: Analytical thinking

1. Taurus Inc. usually produces 5,000 handcrafted products in a day. Recently, the demand for handcrafted products drastically increased as one of its products became a popular item for home décor. Due to this increase, the company had to up its production level to 10,000 products per day. This, however, decreased the price of individual products. This scenario best illustrates _____.

A. economies of wealth

B. economies of finance

C. economies of scope

D. economies of scale

Level of Difficulty: Hard

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Application

AACSB: Application of knowledge

1. The relatively fixed costs such as the costs of plant and equipment, which do not increase with an increase in the number of units manufactured, are known as _____.

A. fixed cost of production

B. fixed cost of supply

C. fixed cost of demand

D. fixed cost of scale

Level of Difficulty: Easy

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Knowledge

AACSB: Analytical thinking

1. Nirvana Publishing House invested on high-end printing equipment. After a year of production, the company had to double the amount of production of its newspapers and weekly magazine because of high customer demand. However, the company did not have to invest in another similar equipment to meet demands. This is an example of a _____.

A. fixed cost of demand

B. fixed cost of scale

C. fixed cost of production

D. fixed cost of supply

Level of Difficulty: Hard

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Application

AACSB: Application of knowledge

1. Which of the following statements is true of research and development (R&D)?

A. Small volumes of production enable firms to spread the cost of research and development (R&D), advertising, and general and administrative expenses.

B. The higher a firm’s R&D costs, the more the scope for the company to expand globally allowing costs to be spread across more customers.

C. Adding R&D allows a firm to have a cost advantage over competitors.

D. Eliminating R&D helps firms to lead in launching new product designs.

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Fuchsia Corp., a retail chain, opens four outlets in different locations of a city. It markets itself for attracting customers to these locations. The company invests in promotional campaigns for one of the outlets and then divides the expenses among the four outlets. Which of the following is the subject of economies of scale in the described scenario?

A. Production costs

B. General costs

C. Research and development expenses

D. Advertising expenses

Level of Difficulty: Hard

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Application

AACSB: Application of knowledge

1. MediDose Inc., a pharmaceutical company, has been studying and experimenting with a few drugs. After 10 years of conducting and standardizing tests, the company comes up with positive results that would help many patients. These drugs become popular and effective among millions of patients and enable the company to expand its operations across the globe while spreading out the cost of the studies. Which of the following is the subject of economies of scale in the described scenario?

A. Research and development expenses

B. Advertising expenses

C. General and administrative costs

D. Production costs

Level of Difficulty: Hard

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Application

AACSB: Application of knowledge

1. The expenses and taxes that are directly related to the wide-ranging operation of a company best define the term _____.

A. sunk costs

B. research and development costs

C. incentives and promotional costs

D. general and administrative costs

Level of Difficulty: Easy

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Knowledge

AACSB: Analytical thinking

1. Which of the following statements is true of a company’s general and administrative costs (G&A)?

A. They are part of a company’s production costs.

B. They exclude the expenses of operating a company.

C. They include Research and Development (R&D) expenses.

D. They help a company with high sales volume that creates cost advantage by managing its G&A across more units.

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. The Finance Department of Neptune Industries has to audit expenses and profits made each year. It creates separate databases for costs accrued in the form of equipment used in the company and for other costs such as costs of accounting, rent, and managerial salaries. Which of the following is the subject of economies of scale in the described scenario?

A. Research and development expenses

B. General and administrative costs

C. Incentives and promotional costs

D. Advertising expenses

Level of Difficulty: Hard

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Application

AACSB: Application of knowledge

1. Which of the following is a primary characteristic of employing automated equipment in a company with high levels of production?

A. They help employees to acquire specialized knowledge that helps them complete tasks more efficiently.

B. The general and administrative costs would be high for large companies.

C. They do not help in spreading out the fixed cost of production.

D. Large companies can reduce per-unit cost of production.

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Breaking a large process into smaller elements that require specialized knowledge is known as _____.

A. professional specialization

B. employee specialization

C. task specialization

D. process specialization

Level of Difficulty: Easy

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Knowledge

AACSB: Analytical thinking

1. Which of the following is a feature of task specialization?

A. It causes workers to be confused about the task at hand.

B. It enables employees to choose tasks that they are most capable of performing.

C. It enables workers to be more efficient and thus enables them to avoid loss of time.

D. It results in job dissatisfaction because employees have to repeat the same functions over time.

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Connections Communications Inc. has been able to achieve optimal efficiency by identifying a task for each employee and enabling them to become thoroughly proficient in their tasks. The company has realized that employees develop an expertise in their specified job profile over time and they gradually begin to work faster than when they started the job. This is an example of _____.

A. task specialization

B. employee specialization

C. minimum efficient scale

D. competitive parity

Level of Difficulty: Hard

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Application

AACSB: Application of knowledge

1. Turbine Industries breaks down its manufacturing process into smaller segments that are performed by employees who are trained very well. This also helps the firm to save time because this way the employees do not need to juggle between various tasks. This scenario best illustrates _____.

A. minimum efficient scale

B. competitive parity

C. employee specialization

D. task specialization

Level of Difficulty: Hard

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Application

AACSB: Application of knowledge

1. The increased efficiency that results when employees perform a narrow range of tasks over and over again leading them to acquire specialized knowledge that helps them complete the task more efficiently accurately defines the term _____.

A. competitive parity

B. minimum efficient scale

C. task specialization

D. employee specialization

Level of Difficulty: Easy

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Knowledge

AACSB: Analytical thinking

1. Attire Corp., a garment manufacturing company, explains to its employees why its previous year’s sales had not met the required standards. The management uses a diagram of the cost acquired for each item manufactured against the volume of items produced in a particular period of time. The pictorial representation is an example of the _____.

A. scale curve

B. value curve

C. learning curve

D. experience curve

Level of Difficulty: Hard

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Application

AACSB: Application of knowledge

1. What is true about a minimum efficient scale?

A. It shows the optimal quantity for a company to produce.

B. It can be most efficiently maintained in large industries by increasing the level of production.

C. It proves that the costs per unit decrease with increases in volume till they reach and then maintain the minimal level.

D. It can be achieved by large industries during economic downturns because they can easily spread their fixed costs when demand declines.

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. DFN Inc. expanded its manufacturing plant to employ more equipment because the management of the company thought this would help them attain more sales. Unfortunately, this affected the cost of each unit produced because the company invested more finances for better equipment. This also led to a decrease in sales as customers were not willing to buy the product for an increased price. This scenario best illustrates _____.

A. competitive failure

B. diseconomies of scale

C. economies of scale

D. virtuous circle

Level of Difficulty: Hard

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Application

AACSB: Application of knowledge

1. Blaze Corp., a car company, shared its costs of producing cars. It did so by introducing the production of car accessories that are used by customers to upgrade or customize their cars. Blaze Corp. started selling car accessories such as engine oils, wheels, and music player and thus shared its market research costs between cars and car accessories. This led to a definite decrease in the overall cost of production. This scenario best illustrates _____.

A. economies of scale

B. economies of finance

C. economies of wealth

D. economies of scope

Level of Difficulty: Hard

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Application

AACSB: Application of knowledge

1. Orange Superstore is largely customer centric and economical in its methods. The store sells the best quality products at prices that are lower than other stores. The store depends on the fact that its salespeople get better at completing their tasks over time. This method used by Orange Superstore is an example of _____.

A. cost limitation strategy

B. cost advantage strategy

C. proprietary knowledge strategy

D. sustained competitive advantage strategy

Level of Difficulty: Hard

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Application

AACSB: Application of knowledge

1. Li, the president of Lavender Inc., believes that when employees are trained, they should work on one particular task till they know how to perform it perfectly. Thus, the employees are usually encouraged to repeatedly perform their designated tasks. Li claims that the more an employee engages in a particular task, the more skilled he or she will become at it. Which of the following statements strengthens Li’s belief?

A. Employees will feel a sense of job dissatisfaction and will lose their overall enthusiasm for their jobs.

B. The work of employees will speed up while compromising their attention to detail.

C. This method of training requires a lot of time, effort, patience, and finances.

D. Employees will find better ways at completing the same task.

Level of Difficulty: Hard

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Analyze

AACSB: Reflective thinking

1. A group of students studying a firm named Sanders & Collins Corp. found that the workers initially learned their task-related activities very fast. In turn, this helped the firm reduce the labor cost incurred in producing each product. However, their rate of learning these tasks reduced over time. This scenario best illustrates the _____.

A. experience curve

B. learning curve

C. value curve

D. scale curve

Level of Difficulty: Hard

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Application

AACSB: Application of knowledge

1. In a recent presentation by the management of Seas Inc., the presenters conducted a discussion with a pictorial chart on the cumulative units of production of the company and its correlation with the cost per unit of the product. Which of the following charts did the presenters of Seas discuss?

A. The learning curve

B. The experience curve

C. The scale curve

D. The value curve

Level of Difficulty: Hard

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Application

AACSB: Application of knowledge

1. Vladimir, the CEO of Autumn Inc., claims that a learning curve is a better option of identifying the growth of the company. His assistant, Mark, states that growth can be better assessed if a scale curve is used as it reflects reliable and validated results and moreover it shows results of a specific time period. Which of the following statements strengthens Vladimir’s claim?

A. A scale curve captures the effects of economies of scale.

B. A learning curve assesses the overall company from its inception.

C. Results of the assessment will definitely contain certain irregularities.

D. Both the processes are cumbersome and will require expertise to acquire necessary data.

Level of Difficulty: Hard

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Analyze

AACSB: Reflective thinking

1. Indigo Inc. experienced a drop in the price of each product as the overall volume of production increased. This relationship or method caused an increase in profits accrued by the company. This is an example of the _____.

A. law of motion

B. law of experience

C. law of value

D. law of knowledge

Level of Difficulty: Hard

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Application

AACSB: Application of knowledge

1. Mercury Corp., a startup company, is sure that it will achieve a steep curve of 75 percent as it is selling a unique product that has not been introduced into the market before. The company is confident that this product will be sold at a fast rate due to two reasons: the product is a necessity in every home and it is a break-through solution. Mercury sees this product as helping the company grow at a fast pace. Which of the following strategies has Mercury Corp. adopted?

A. The growth/investment strategy

B. The pricing strategy

C. The cost-management strategy

D. The acquisition strategy

Level of Difficulty: Hard

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Application

AACSB: Application of knowledge

1. Lavender Inc., a computer manufacturing company, sells its products at costs that are lesser than its competitors as it wishes to gain profits in order to cover more of the competitive market. The company follows this method as it has high unit volumes. The scenario best illustrates the _____.

A. acquisition strategy

B. cost-management strategy

C. pricing strategy

D. investment strategy

Level of Difficulty: Hard

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Application

AACSB: Application of knowledge

1. Trends Inc. has been awarded the best branded clothing company award for three years consecutively. The CEO of the company stated that this was possible due to the company strategically lowering the cost of each unit produced, and successfully maintaining that method in order to effectively contain finances. While comparing Trends with other similar production companies, it was found out that the company did certainly collect more profit than the others. The scenario best illustrates the:

A. acquisition strategy.

B. investment strategy.

C. pricing strategy.

D. cost-management strategy.

Level of Difficulty: Hard

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Application

AACSB: Application of knowledge

1. Rinkon Inc., an automobile company, purchased its competitor TrackRoads Inc. that had similar production quantities and a sufficient amount of raw materials. This takeover was done to decrease the unit cost production of Rinkon and to increase its production using more equipment in Rinkon. This strategy led to record profits and more customers investing their finances on cars manufactured by Rinkon. The scenario best illustrates the:

A. acquisition strategy.

B. pricing strategy.

C. cost-management strategy.

D. investment strategy.

Level of Difficulty: Hard

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Application

AACSB: Application of knowledge

1. Ming Gardens Corp., an interior design company, is solely owned by Veronica. The company has been able to achieve competitive advantage due to the knowledge acquired by Veronica over the years. This knowledge was attained under the protective custody of Veronica and she does not want to publish them to anyone. This scenario reflects the development of _____.

A. procedural wisdom

B. proprietary knowledge

C. collective intellect

D. explicit knowledge

Level of Difficulty: Hard

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Application

AACSB: Application of knowledge

1. The board of directors of Colors Corp., a new startup, chalked out a list of resources that would be needed to optimize the efficiency of the company. It needed a human resources department to take care of recruitment, a few suppliers to provide raw materials, a few data recording equipment such as computers to store and manage data, and a large geographical area to start the company. The board stated that these provisions would help the company obtain desired profits. The resources and provisions mentioned in this scenario are examples of _____.

A. outputs

B. incomes

C. inputs

D. outcomes

Level of Difficulty: Hard

Section reference: Lower Input Costs

Learning Objective: 4.3

Bloom’s: Application

AACSB: Application of knowledge

1. Yellow Corp., a supplier that provides raw materials to a leading computer brand, had to lower its costs by 7 percent as the computer brand doubled its order. As a result, Yellow Corp. experienced economies of scale. This negotiation tactic is an example of _____.

A. task specialization

B. purchasing volume

C. learning curves

D. competitive advantage

Level of Difficulty: Hard

Section reference: Lower Input Costs

Learning Objective: 4.3

Bloom’s: Application

AACSB: Application of knowledge

1. Five Checkers Inc. has been able to purchase more supplies for less money than its competitors. Five Checkers makes use of a set of communication skills that create compromising deals with its suppliers. Sound reasons are stated by Five Checkers to show why the suppliers must reduce their prices. The reasons are accepted by the suppliers and thus have helped increase profits for Five Checkers Inc. In this scenario, Five Checkers Inc. used _____.

A. purchasing volume

B. negotiating volume

C. learning curves

D. negotiating tactics

Level of Difficulty: Hard

Section reference: Lower Input Costs

Learning Objective: 4.3

Bloom’s: Application

AACSB: Application of knowledge

1. String Line Inc. has established a loyal supplier base. The management at String Line had created a system in which it chooses a supplier that is reasonably affordable, and instead of quoting the company’s price and demanding that it be met, it complies with the supplier’s quotes. Over time, this has established a bond of loyalty with the supplier. When String Line opened a new branch, the supplier built its plant close to the branch so as to save transportation costs. Which of the following has String Line Inc. established with the supplier?

A. Rivalry

B. Cooperation

C. Competition

D. Access

Level of Difficulty: Hard

Section reference: Lower Input Costs

Learning Objective: 4.3

Bloom’s: Application

AACSB: Application of knowledge

1. Techno Inc. is a computer hardware company that gets its computer parts from countries that manufacture them for lesser price than what its competitors pay and at a better quality. This allows Techno to save on the prices paid for the raw materials and use them to increase its production volume. Which of the following is Techno Inc. practicing in order to attain cost advantage?

A. Transportation rates

B. Raw material rates

C. Exchange rates

D. Wage rates

Level of Difficulty: Hard

Section reference: Lower Input Costs

Learning Objective: 4.3

Bloom’s: Application

AACSB: Application of knowledge

1. Suppose a garment manufacturer named Vogue Inc. buys materials from another country that is well known for its cotton and silk exports. Recently, the currency of this country fell, which enabled Vogue Inc. to purchase more raw materials. Vogue Inc. achieved cost advantage through _____.

A. labor rates

B. wage rates

C. exchange rates

D. transportation rates

Level of Difficulty: Hard

Section reference: Lower Input Costs

Learning Objective: 4.3

Bloom’s: Application

AACSB: Application of knowledge

1. BizTechno Inc. has always retained competitive advantage over its competitors. The company has offered customer satisfaction for many years by providing the best services and benefits for them. The resources, capabilities, and the organizational structure of the organization have also created an increased edge over its competitors. Which of the following does this scenario best illustrate?

A. Business model

B. Employee specialization

C. Value chain

D. Task specialization

Level of Difficulty: Hard

Section reference: Different Business Model or Value Chain

Learning Objective: 4.4

Bloom’s: Application

AACSB: Application of knowledge

1. TrueBiz Corp. follows a system wherein all the activities of the company are directed toward converting parts of a product into an entire finished good. These activities are done in tandem so that a perfected product can be created which can be sold to a prospective customer. This is an example of a _____.

A. supplier chain

B. value chain

C. product line

D. pricing chain

Level of Difficulty: Hard

Section reference: Different Business Model or Value Chain

Learning Objective: 4.4

Bloom’s: Application

AACSB: Application of knowledge

1. VisionZed Inc., a computer software company, spends a lot of finances on research. It tries to implement the latest technologies available and provides services that are matchless when compared to any of its competitors. At the same time, Xtron Technologies Corp., another computer software company, pays half the price that VisionZed pays on research as it combines the intelligence of different software companies and creates its product. This enables Xtron to have a cost advantage over VisionZed. Xtron Technologies Corp. is an example of a company that eliminates steps in the _____.

A. supply chain

B. growth chain

C. value chain

D. pricing chain

Level of Difficulty: Hard

Section reference: Different Business Model or Value Chain

Learning Objective: 4.4

Bloom’s: Application

AACSB: Application of knowledge

1. Economies of scale _____.

A. exist when cost per unit increases with decrease in volume

B. are not more relevant in some industries than others

C. arise from the ability to spread fixed costs of production

D. produce cost advantages for smaller firms over larger firms

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Which of the following is a principle source from which economies of scale arise?

A. The ability to spread nonproduction costs

B. The ability to get raw materials free of cost

C. Specialization of suppliers

D. Specialization of production

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. What is meant by diseconomies of scale?

A. A reduction in costs per unit due to increases in efficiency of production

B. The smallest level of output (unit volume) that a plant or firm can produce to minimize its long-run average costs

C. The average total cost of production decreases as a result of increasing the number of different goods produced

D. An increase in marginal cost when output is increased

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. In large organizations, diseconomies of scale can happen because large plants _____.

A. are associated with decreased waste

B. become very complex to manage

C. have an output that is below the minimum efficient scale

D. are linked to higher employee motivation

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Which of the following statements is true of cost advantage?

A. Large firms are guaranteed to secure a wide cost advantage.

B. Size and scale do not always guarantee a cost advantage.

C. Firms with high production volumes are sure to gain a cost advantage.

D. Firms which produce standardized products have a cost advantage.

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Identify a true statement about economies of scope.

A. They exist when costs are reduced by increasing the volume of a specific activity.

B. They exist when costs are reduced by expanding the scope of a company’s operations to related activities.

C. They occur when a company decreases its output below the minimum efficient scale.

D. They occur when a company increases its output beyond the minimum efficient scale.

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Which of the following statement is true of the learning curve?

A. It is simpler to calculate than a scale curve.

B. It is a tool that managers use to determine the emotional quotient of an employee.

C. It is the concept that labor costs per unit decrease with increases in volume due to learning.

D. It is a graphic representation of the relationship between cost per unit and scale of production.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Identify a true statement about the experience curve.

A. It is a graphic representation of the relationship between cost per unit and scale of production.

B. It is a tool that managers use to determine the learning capability of an employee.

C. It is simpler to calculate than a scale curve.

D. It is a representation of the relationship between cumulative volume and product cost.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Which of the following statements best defines the law of experience?

A. Costs per unit decrease with increases in cumulative volume of production.

B. The average total cost of production decreases as a result of increasing the number of different goods produced.

C. Cost per unit decreases with increase in the years of experience of employees.

D. Marginal cost increases when output is increased.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. To a strategist, what does the logic of the experience curve suggest?

A. The company with the highest volume in an industry will also be the lowest-cost producer.

B. The company with the steepest learning and experience curves will also be the lowest-cost producer.

C. The company with the lowest market share in an industry will also be the highest-cost producer.

D. The company spending the most on advertising in an industry will also be the lowest-cost producer.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. In the context of the experience curve, what did early work by the Boston Consulting Group show?

A. A company’s relative market share was a key indicator of competitive advantage and profit performance.

B. Learning and experience curve slopes tend to be steeper in the later stages of production.

C. The slope of an experience curve is described by the reduction in costs.

D. Scale curves and experience curves tend to be steeper in service industries when compared to manufacturing industries.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. A scale curve slope in a particular industry that is quite steep indicates that:

A. first movers in a fast-growing market will end up with a cost disadvantage.

B. first movers in a fast-growing market will secure a widening cost advantage.

C. the firms in that industry will have a low cost per unit production.

D. the output of the firms will not be able to meet the minimum efficient scale.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Proprietary knowledge refers to _____.

A. resources such as people, information, or financing that are put into a system

B. the plan and set of activities implemented by a company

C. the sequence of all activities that are performed by a firm

D. information that is not public and that is viewed as the property of the holder

Level of Difficulty: Moderate

Section reference: Proprietary Knowledge

Learning Objective: 4.3

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Identify a primary way in which companies achieve cost advantage through lower-cost inputs.

A. By allowing suppliers to exercise strong bargaining power

B. By cooperating especially well with suppliers

C. By getting inputs from far-off locations

D. By blocking access to inputs for other companies

Level of Difficulty: Moderate

Section reference: Lower Input Costs

Learning Objective: 4.4

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Identify a way in which companies can create a new business model to achieve cost advantage.

A. By exercising strong bargaining power over suppliers

B. By eliminating activities in the value chain

C. By lowering the wages of the human resources

D. By automating the production line

Level of Difficulty: Moderate

Section reference: Different Business Model or Value Chain

Learning Objective: 4.5

Bloom’s: Comprehension

AACSB: Analytical thinking

Fill in the blanks

1. A strategy in which the unique value offered to customers is lower-priced products or services is known as _____.

Level of Difficulty: Easy

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Knowledge

AACSB: Analytical thinking

1. Information that is not public and that is viewed as the property of the holder is called _____.

Level of Difficulty: Easy

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Knowledge

AACSB: Analytical thinking

1. Economies of scale _____.

A. exist when cost per unit increases with decrease in volume

B. are not more relevant in some industries than others

C. arise from the ability to spread fixed costs of production

D. produce cost advantages for smaller firms over larger firms

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Which of the following is a principle source from which economies of scale arise?

A. The ability to spread nonproduction costs

B. The ability to get raw materials free of cost

C. Specialization of suppliers

D. Specialization of production

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. What is meant by diseconomies of scale?

A. A reduction in costs per unit due to increases in efficiency of production

B. The smallest level of output (unit volume) that a plant or firm can produce to minimize its long-run average costs

C. The average total cost of production decreases as a result of increasing the number of different goods produced

D. An increase in marginal cost when output is increased

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. In large organizations, diseconomies of scale can happen because large plants _____.

A. are associated with decreased waste

B. become very complex to manage

C. have an output that is below the minimum efficient scale

D. are linked to higher employee motivation

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Which of the following statements is true of cost advantage?

A. Large firms are guaranteed to secure a wide cost advantage.

B. Size and scale do not always guarantee a cost advantage.

C. Firms with high production volumes are sure to gain a cost advantage.

D. Firms which produce standardized products have a cost advantage.

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Identify a true statement about economies of scope.

A. They exist when costs are reduced by increasing the volume of a specific activity.

B. They exist when costs are reduced by expanding the scope of a company’s operations to related activities.

C. They occur when a company decreases its output below the minimum efficient scale.

D. They occur when a company increases its output beyond the minimum efficient scale.

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Which of the following statement is true of the learning curve?

A. It is simpler to calculate than a scale curve.

B. It is a tool that managers use to determine the emotional quotient of an employee.

C. It is the concept that labor costs per unit decrease with increases in volume due to learning.

D. It is a graphic representation of the relationship between cost per unit and scale of production.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Identify a true statement about the experience curve.

A. It is a graphic representation of the relationship between cost per unit and scale of production.

B. It is a tool that managers use to determine the learning capability of an employee.

C. It is simpler to calculate than a scale curve.

D. It is a representation of the relationship between cumulative volume and product cost.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Which of the following statements best defines the law of experience?

A. Costs per unit decrease with increases in cumulative volume of production.

B. The average total cost of production decreases as a result of increasing the number of different goods produced.

C. Cost per unit decreases with increase in the years of experience of employees.

D. Marginal cost increases when output is increased.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. To a strategist, what does the logic of the experience curve suggest?

A. The company with the highest volume in an industry will also be the lowest-cost producer.

B. The company with the steepest learning and experience curves will also be the lowest-cost producer.

C. The company with the lowest market share in an industry will also be the highest-cost producer.

D. The company spending the most on advertising in an industry will also be the lowest-cost producer.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. In the context of the experience curve, what did early work by the Boston Consulting Group show?

A. A company’s relative market share was a key indicator of competitive advantage and profit performance.

B. Learning and experience curve slopes tend to be steeper in the later stages of production.

C. The slope of an experience curve is described by the reduction in costs.

D. Scale curves and experience curves tend to be steeper in service industries when compared to manufacturing industries.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. A scale curve slope in a particular industry that is quite steep indicates that:

A. first movers in a fast-growing market will end up with a cost disadvantage.

B. first movers in a fast-growing market will secure a widening cost advantage.

C. the firms in that industry will have a low cost per unit production.

D. the output of the firms will not be able to meet the minimum efficient scale.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Proprietary knowledge refers to _____.

A. resources such as people, information, or financing that are put into a system

B. the plan and set of activities implemented by a company

C. the sequence of all activities that are performed by a firm

D. information that is not public and that is viewed as the property of the holder

Level of Difficulty: Moderate

Section reference: Proprietary Knowledge

Learning Objective: 4.3

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Identify a primary way in which companies achieve cost advantage through lower-cost inputs.

A. By allowing suppliers to exercise strong bargaining power

B. By cooperating especially well with suppliers

C. By getting inputs from far-off locations

D. By blocking access to inputs for other companies

Level of Difficulty: Moderate

Section reference: Lower Input Costs

Learning Objective: 4.4

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Identify a way in which companies can create a new business model to achieve cost advantage.

A. By exercising strong bargaining power over suppliers

B. By eliminating activities in the value chain

C. By lowering the wages of the human resources

D. By automating the production line

Level of Difficulty: Moderate

Section reference: Different Business Model or Value Chain

Learning Objective: 4.5

Bloom’s: Comprehension

AACSB: Analytical thinking

Short Answers

1. When do economies of scope come into existence?

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Explain why a learning curve is more complex than a scale curve.

Level of Difficulty: Moderate

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Analytical thinking

1. Which is an important source of proprietary knowledge?

Level of Difficulty: Easy

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Knowledge

AACSB: Analytical thinking

Essay Questions

1. Define economies of scale and list out its four principle sources.

Level of Difficulty: Easy

Section reference: Economies of Scale and Scope

Learning Objective: 4.1

Bloom’s: Knowledge

AACSB: Analytical thinking

1. Define the cost advantage strategy and its characteristics.

Level of Difficulty: Easy

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Knowledge

AACSB: Analytical thinking

1. Define learning curve, experience curve, and scale curve. Compare them with each other.

The learning curve is a tool that managers can use to determine the contribution of human learning on the part of employees to reductions in costs per unit. Learning curve advantages are also relevant in service industries such as accounting, consulting, legal services, and even personal services like hair styling.

The learning curve is more complex than a scale curve to calculate because it requires gathering data on the cumulative volume of a given product or service produced, the total amount since the company started making the product or providing the service. The scale curve shows how costs per unit change with increases of volume of production during a given time period, such as a quarter, half-year, or year. It is easier for companies to obtain cost information from specific time periods.

An experience curve does a better job of capturing learning effects than a scale curve, because it is based on cumulative volume, like the learning curve. But, it also does a better job of capturing the effects of economies of scale than a learning curve does, because it includes all costs, not just labor. However, if data from the same time period are used to calculate a scale curve and experience curve, both analyses produce the same result. Like scale curves, experience curves are applicable to service, as well as manufacturing, industries.

Level of Difficulty: Moderate

Section reference: Economies of Scale and Scope

Section reference: Learning and Experience

Learning Objective: 4.1

Learning Objective: 4.2

Bloom’s: Comprehension

AACSB: Application of knowledge

1. Explain proprietary knowledge and its important sources.

Level of Difficulty: Easy

Section reference: Learning and Experience

Learning Objective: 4.2

Bloom’s: Knowledge

AACSB: Analytical thinking

1. Mention the four ways that companies achieve cost advantage through lower-cost inputs and explain bargaining power over suppliers.

Perhaps the most important way that companies get lower-cost inputs is by having greater bargaining power over suppliers than their competitors do. There are two main sources of bargaining power: buying a lot from the supplier and using successful negotiating tactics.

(1) Purchasing Volume: Perhaps not surprisingly, suppliers can be expected to drop prices when buyers increase their volume of purchases. Indeed, as a rule of thumb, suppliers are known to drop prices by 5 to 10 percent with a doubling of purchased volume. At high volumes, suppliers experience economies of scale and the law of experience, so they can lower their prices.

(2) Purchasing and Negotiating Tactics: Even when two firms purchase similar volumes of inputs, one of the firms may have negotiation skills and purchasing tactics that allow it to get inputs at lower prices.

Level of Difficulty: Moderate

Section reference: Lower Input Costs

Learning Objective: 4.3

Bloom’s: Comprehension

AACSB: Analytical thinking