Calculation of Average Costs with Economies of Scope Jan's Bakery is considering a merger with Tina's Cookies. Jan's total operating costs of producing services are $300,000 for a sales volume of $2 million. Tina's total operating costs of producing services are $75,000 for a sales volume of $600,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.

Question

Quizplus · Accepted Answer

To calculate the total average cost for the merged firm, we need to first calculate the weighted average of the individual firms' costs.

Weighted average cost = (Total operating costs of Jan's Bakery + Total operating costs of Tina's Cookies) / (Total sales of Jan's Bakery + Total sales of Tina's Cookies)

Weighted average cost = ($300,000 + $75,000) / ($2,000,000 + $600,000)
Weighted average cost = $375,000 / $2,600,000
Weighted average cost = 0.14423 or 14.42%

Therefore, the total average cost for the merged firm assuming no synergies is 14.42%.

The correct answer is (C).