A potato chip manufacturer purchases a potato farm. Which of the following regarding its strategy is true? The manufacturer has effectively reduced its operating costs by outsourcing its activities. The manufacturer has enhanced utilization by allowing depreciation and other fixed costs to be spread over a larger unit volume.

The correct answer is letter "C": The manufacturer has effectively used vertical integration to increase its bargaining position and reduce transaction costs.

Explanation:

Vertical integration occurs when a company purchases and controls other companies along its supply chain. There are two types of vertical integration: backward and forward. In the context of backward vertical integration, a company such as a manufacturer owns companies that supply inputs to manufacturing processes. A corporation owns another business in forward vertical integration, to get closer to the ultimate customer in the supply chain.

Therefore, a potato chip manufacturer by buying a potato farm is engaging in backward vertical integration.