One Day Dry Cleaning is considering a merger with Speedy's Laundry Supply Stores. One Day's total operating costs of producing services are $450,000 for sales volume (SG) of $3.75 million. Speedy's total operating costs of producing services are $200,000 for a sales volume (SW) of $1.70 million. For a sales volume of $5 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 11 percent.
A) $100,000
B) $200,000
C) $450,000
D) $550,000

Question

Quizplus · Accepted Answer

The correct answer is A.The total average cost (TAC) is equal to the total operating costs divided by the sales volume. For the merged firms, the total operating costs are $450,000 + $200,000 = $650,000. The sales volume is $3.75 million + $1.70 million = $5 million. Therefore, the TAC for the merged firms is $650,000 / $5 million = $130,000.To reduce the TAC to 11 percent, the merged firms need to reduce their total operating costs by $130,000 * 0.11 = $14,300. Therefore, the correct answer is A.

One Day Dry Cleaning Is Considering a Merger with Speedy's