Economies of scale and minimization of the cost: Evidence from a manufacturing company

The presence of economies of scale allows industries and companies to have better profits. In the present study, the translog cost function of a manufacturing company in Mexico is estimated during the period January 2013 to September 2016 to know the type of returns to scale that the company has. The results indicate that elasticity of production with respect to cost is one, where increases in production lead to increases in the same proportion in costs.
The theory indicates that there are 3 possible ways in which a company could operate with economies of scale and minimize cost: the first is to analyze if the number of workers is optimal and we conclude that the number of employees is optimal. The second reason consists of the ability to manage the costs of the company. Actually this company uses a standard cost system which is proposed to analyze whether the management of the company is more effective to consider a new form of cost, so an analysis is done through Activity-Based Costing (ABC). The results indicate that for models that are manufactured in small and medium assembly lines, considering ABC costing would be beneficial. The third reason a company can operate with economies of scale is that the company must have flexibility in the use of inputs and thus organize its production process more effectively. According to the results, it is observed that there is very little substitution between labor and freight (-0.075) and between labor and administrative cost (-0.057).