mgt3323_mod5_assignment2_worksheet004.docx

Production and Operations Management

Economies of Scale: Cupcake Example

This assignment will reinforce the concept of economies of scale. Economies of scale can provide firms with a competitive cost advantage that arises with increased output of a product. The greater the quantity of a good produced, the lower the per-unit cost because these costs are shared over a larger number of goods. To complete this assignment, download and save this worksheet so you can edit the sections below, then complete the steps that follow and submit a saved copy of the worksheet in Blackboard.

Introduction:
Imagine you are making cupcakes. This assignment was based on actual prices of materials sourced from Target, Inc. Ingredients needed to make one batch (12) cupcakes from a box mix include:
· 1 box mix
· 2 Grade A large eggs
· ½ cup (4 oz.) vegetable oil
· 1 container of icing
· Water

The cost of each ingredient, as well as the various purchasing options, is provided below:
· Box mix ($1.02/box mix, makes 12 cupcakes)
· Grade A large eggs ($1.64/dozen; $2.15/18)
· Vegetable oil ($2.14/48 oz.; $5.64/64 oz.; $7.59/128 oz.)
· Icing ($1.54/16 oz.)
· Water (free)

Step 1: Cost Per Unit

Calculate the cost per unit for the following items in the right column. To do this, you will need to divide the price of the item by the amount of that item in each package.

Item

Cost Per Unit

(Make sure to specify the unit.

The first one is completed for you.)

Box mix ($1.02/box mix, makes 12 cupcakes)

$1.02 / 12 = $0.09 / 1 cupcake

Grade A large eggs ($1.64/dozen)

Grade A large eggs ($2.15/18 eggs)

Vegetable oil ($2.14/48 oz.)

Vegetable oil ($5.64/64 oz.)

Vegetable oil ($7.59/128 oz.)

Icing ($1.54/16 oz.)

3

Step 2: Determine the Cost

Calculate the following costs in the white boxes below.

You only need 1 CUPCAKE. (Note that the box mix, for example, can only be bought as a whole box, which makes a batch of 12. You will need to buy the raw materials as if you are making 12 cupcakes even though you only need one.) Determine the TOTAL cost to make one cupcake (list your items, the cost of each item purchased, and the total cost):

Determine the TOTAL cost to make one cupcake (you need to list the ingredients and their prices as well as the total cost):

Determine the COST PER CUPCAKE to make one cupcake (divide the total cost by 1):

You need 12 CUPCAKES.

Determine the TOTAL cost to make 12 cupcakes (you need to list the ingredients and their prices as well as the total cost):

Determine the COST PER CUPCAKE to make 12 cupcakes (divide the total cost by 12):

You need 120 CUPCAKES.

Determine the TOTAL cost to make 120 cupcakes (you need to list the ingredients and their prices as well as the total cost):

Determine the COST PER CUPCAKE to make 120 cupcakes (divide the total cost by 120):

Step 3: Reflection

Address the questions below:

1. Compare the cost per cupcake to make 1, 12, or 120 cupcakes. How does this relate to the concept of economies of scale?

Type in your response here…

2. What is the relationship between economies of scale and outsourcing?

Type in your response here…

3. When procuring raw materials, it is important to compare prices and vendors, specifically the price per unit of material. Were there any instances in which buying a smaller container was more cost effective than buying a larger container? Is it always more cost effective to buy in bulk?

Type in your response here…

4. What are some examples of economies of scale and diseconomies of scale in a college environment?

Type in your response here…