Walmart Fixed Costs

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When the average cost of production decreases as the volume of its output increases, the process of economies of scale is said to be achieved. For instance, it may cost $3,000 to produce 100 copies of a magazine yet only $4,000 for 1,000 copies. The average cost dropped from $30 to $4 per magazine because the main elements of cost in producing the copies (editing, designing etc.) are distinct from the number of magazines produced. Adam Smith recognized the division of labor and specialization as the two-key means to achieve a larger return on production. These techniques help employees concentrate on their specific work-related tasks and in time, their skills necessary to perform their jobs will be enhanced. Hence, efficiency is increased and…show more content…
Since Wal-Mart is a hypermarket, in a certain area it needs a warehouse and needs some trucks used to deliver their goods. The cost for renting warehouse and buying trucks belong to fixed cost. However, Wal-Mart is a large-scale corporation and various locations. Thus, the fixed cost can be spread over its large volume of outputs. Then it can achieve economies of scale. Second resource of economies of scale may be increased productivity of variable inputs, such as specialization of labor and efficiencies in energy usage. The corporation has different groups of people specialized in customer service, inventory control, purchasing and many other areas of the field. The inventories in Wal-Mart has established a specialized distribution channel that was not easily matched for its competitors. The company developed the ability to distribute its merchandise from a vast network of distribution centers served by a private truck fleet. This allowed them to restrict inventory while simultaneously open more stores. Efficient distribution channels help in lowering prices. Finally, the most obvious of resources of economies of scale that Wal-Mart implements is purchasing in bulks. Big companies that make large purchases from their suppliers may obtain discounts allowing them to enjoy a cost advantage over smaller competitors. Thus, Wal-Mart can price their products at the…show more content…
Boone Pickens, a geologist, wrote about diseconomies of scale in his 1987 autobiography: “It's unusual to find a large corporation that's efficient. I know about economies of scale and all the other advantages that are supposed to come with size. But when you get an inside look, it's easy to see how inefficient a big business really is. Most corporate bureaucracies have more people than they have work.” Diseconomies could stem from inefficient managerial or labor policies, poor communication, alienation, lack of control, and over-hiring or deteriorating transportation networks. Furthermore, as a company's scope increases, it may have to distribute its goods and services in progressively more discrete areas. This can increase average costs resulting in diseconomies of scale. Some efficiencies and inefficiencies are more location specific, while others are not affected by area. If a company has many plants throughout the country, they can all benefit from costly inputs such as advertising. However, efficiencies and inefficiencies can alternatively stem from a location, such as a good or bad climate for farming. When economies of scale or diseconomies of scale are location specific, trade is used to gain access to the

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