Crib World is considering a merger with Tots Supply Stores. Crib's total operating costs of producing services are $250,000 for sales volume of $1.25 million. Tots' total operating costs of producing services are $210,000 for a sales volume (JP) of $900,000. For a sales volume of $2.15 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 17.5 percent.
A) Decrease of $376,250
B) Decrease of $83,750
C) Decrease of $127,500
D) Decrease of $87,500

Question

Quizplus · Accepted Answer

The total operating costs for Crib and Tots before merging are $250,000 + $210,000 = $460,000. The total sales volume for both is $1.25 million + $900,000 = $2.15 million. To achieve a TAC of 17.5% for the merged firms, the total costs should be 17.5% of $2.15 million, which is $376,250. Therefore, the reduction in production costs needed is the difference between the current total costs ($460,000) and the target costs ($376,250), which is $83,750.

Crib World Is Considering a Merger with Tots Supply Stores