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ACCA Applied Knowledge · Business and Technology · Microeconomic factors

Two small independent hotel chains merge and, as a result, share one reservations system, one head office and one brand campaign, cutting the cost per room sold. Which statement about this saving is most accurate?

It is an internal economy of scale. The cost saving results from the merged firm's own growth, as it shares reservations, head office and branding across more rooms. External economies come from industry-wide growth, and sharing functions removes duplication, so it is not a diseconomy.

  1. AIt is an internal economy of scale arising from the firm's own growthCorrect
  2. BIt is an external economy of scale arising from growth of the whole industry
  3. CIt is a diseconomy of scale arising from duplicated functions

Explanation

The savings come from the merged firm's own larger size through shared administrative, technical and marketing resources, so they are internal economies. External economies arise from growth of the industry as a whole, such as a local skilled labour pool. Sharing functions reduces rather than creates duplication, so it is not a diseconomy.

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