Economies of scale exist if the average cost of production declines as output increases. Krajewski and Ritzman (1999) state four reasons why economies of scale can drive costs down when output increases: Fixed costs are spread over more units, construction costs are reduced, costs of purchased materials are cut, and process advantages are found. Keeping the first of these four principles in mind, there are three reasons for conducting this research. First, a trend exists in the credit union industry toward a growth in membership and a decline in the number of credit unions. As this trend continues, it is important to determine if the pursuit of growth opportunities could allow increased efficiency via cost reduction. Second, from a safety and security aspect for the credit union industry, economies of scale would lead to an increase in the capitalization levels of undivided earnings and regular reserves in credit unions. This potential for increased capital reserve levels in response to increasing credit union assets would lead to a relaxation of regulatory policies. The third reason for this study's importance is that it will provide an up-to-date analysis of the economies of scale argument. By using the credit unions of the Commonwealth of Virginia, the researcher will contribute to the limited body of knowledge concerning state-specific credit union industry economies of scale.
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