Calculation of Average Costs with Economies of Scope Building Supplies is considering a merger with Tools and More. Building's total operating costs of producing services are $4 million for a sales volume of $20 million. Tools' total operating costs of producing services are $1 million for a sales volume of $5 million. Suppose that synergies in the production process result in a cost of production for the merged firms totaling $4.8 million with total sales remaining unchanged. Calculate the total average cost for the merged firm.

Question

Quizplus · Accepted Answer

To calculate the average cost for the merged firm, we need to divide the total cost by the total sales. 
Total cost for the merged firm is $4.8 million. 
Total sales for the merged firm is $25 million ($20 million from Building Supplies and $5 million from Tools and More). 
Average Cost = Total Cost / Total Sales = $4.8 million / $25 million = 0.192 or 19.2%. Therefore, the answer is (C).