Economies of Scope A survey of a local market has provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $5 million and an average cost of 15 percent. Anderson Architects (AA) has assets of $8 million and an average cost of 20 percent. Cole Home Builders (CHB) has assets of $8 million and an average cost of 17 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. If JCC plans to reduce operating costs by $300,000 after the merger, what will the average cost be for the new firm?

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The total assets after the merger will be $5 million + $8 million + $8 million = $21 million. The total cost before the merger is 15% of $5 million + 20% of $8 million + 17% of $8 million = $750,000 + $1,600,000 + $1,360,000 = $3,710,000. After reducing costs by $300,000, the total cost will be $3,410,000. The new average cost is $3,410,000 / $21,000,000 = 16.238%.

Economies of Scope a Survey of a Local Market Has