A survey of a local market has provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $3 million and an average cost of 22 percent. Anderson Architects (AA) has assets of $4 million and an average cost of 31 percent. Cole Home Builders (CHB) has assets of $5 million and an average cost of 28 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. If JCC plans to reduce operating costs by $500,000 after the merger, what will the average cost be for the new firm?
A) 23.33 percent
B) 23.87 percent
C) 24.12 percent
D) 22.50 percent

Question

Quizplus · Accepted Answer

To calculate the new average cost, first determine the total costs and assets before the merger. JCC's costs are $660,000 (22% of $3 million), AA's costs are $1.24 million (31% of $4 million), and CHB's costs are $1.4 million (28% of $5 million). The total pre-merger costs are $3.3 million ($660,000 + $1.24 million + $1.4 million). The total assets are $12 million ($3 million + $4 million + $5 million). After planning to reduce operating costs by $500,000, the new total costs are $2.8 million ($3.3 million - $500,000). The new average cost percentage is calculated as the new total costs divided by the total assets, which is 23.33% ($2.8 million / $12 million).

A Survey of a Local Market Has Provided the Following