Minimum Efficient Scale Estimation
Kanata Corporation is a leading manufacturer of telecommunications equipment based in Ontario, Canada. Its main product is microprocessor- controlled telephone switching equipment, called automatic private branch exchanges (PABXs), capable of handling 8 to 3,000 telephone extensions. Severe price cutting throughout the PABX industry continues to put pressure on sales and margins. To better compete against increasingly aggressive rivals, the company is contemplating the construction of a new production facility capable of producing 1.5 million units per year. Kanata's in-house engineering estimate of the total cost function for the new facility is
TC = $3,000 + $1,000Q + $0.003Q2:
MC = $1,000 + $0.006Q
where TC = total costs in thousands of dollars, Q = output in thousands of units, and MC = marginal costs in thousands of dollars.
A. Estimate minimum efficient scale in this industry.
B. In light of current PABX demand of 30 million units per year, how would you evaluate the future potential for competition in the industry?