Cathy Corp. is considering a merger with Russell, Inc. Cathy's total operating costs of producing services are $200,000 for a sales volume (SC) of $700,000. Russell's total operating costs of producing services are $400,000 for a sales volume (SB) of $1 million. If the two firms merge, calculate the total average cost (TAC) for the merged firm assuming no synergies.
A) 28.57 percent
B) 35.29 percent
C) 40.00 percent
D) 68.57 percent

Question

Quizplus · Accepted Answer

The total operating costs for the merged firm are $200,000 + $400,000 = $600,000. The total sales volume is $700,000 + $1,000,000 = $1,700,000. The total average cost (TAC) is calculated as total operating costs divided by total sales volume: $600,000 / $1,700,000 = 0.3529 or 35.29 percent.