4.6 Article

The sufficiency of product and variable costs for production-related decisions when economies of scope are present

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ELSEVIER SCIENCE BV
DOI: 10.1016/j.ijpe.2008.03.003

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product cost; economies of scope; activity-based costing; product mix decision; mathematical programming

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This article examines the usefulness of product and variable costs for pricing, product mix, and capacity expansion decisions when economies of scope are present. A numerical example demonstrates that the sufficiency of product and variable costs are diminished are the most when economies of scope are present, even under economic conditions that are conducive for product and variable costs to lead to an optimal decision. Further analysis of production-related decisions with hard constraints indicates that the usefulness of variable costing incorporating the effect of a bottleneck activity is also diminished when economies of scope are present. Since economies of scope are one of the primary conditions necessary for firms to produce multiple products in a competitive economy [Panzar, J., Willig, R., 1981. Economies of scope. American Economic Review 71 (2), 268-272], the findings of this article bring into question the sufficiency of product and variable costs for production-related decisions. (C) 2008 Elsevier B.V. All rights reserved.

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