Calculation of Average Costs with Economies of Scope Jewelry Designs is considering a merger with Beads Supply Stores. Jewelry's total operating costs of producing services are $300,000 for sales volume of $2 million. Beads' total operating costs of producing services are $125,000 for a sales volume (J_P) of $2.25 million. For a sales volume of $4.25 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 8%.

Question

Quizplus · Accepted Answer

To find the reduction in production costs needed, calculate the total costs for the merged firms and the target total costs for an 8% TAC. The current total costs are $300,000 + $125,000 = $425,000. The target TAC for $4.25 million sales is 8%, which is $340,000. Therefore, the reduction needed is $425,000 - $340,000 = $85,000.