Economies of Scope A survey of a national market has provided the following average cost data: Jackson County Construction (JCC) has assets of $2 million and an average cost of 30 percent. Arkansas Architects (AA) has assets of $1.5 million and an average cost of 20 percent. Colorado Home Builders (CHB) has assets of $500,000 and an average cost of 10 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 $200,000 after the merger, what will the average cost be for the new firm?

Question

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The total assets after the merger will be $2 million + $1.5 million + $0.5 million = $4 million. The total initial costs are 30% of $2 million + 20% of $1.5 million + 10% of $0.5 million = $0.6 million + $0.3 million + $0.05 million = $0.95 million. After reducing costs by $200,000, the new total cost is $0.95 million - $0.2 million = $0.75 million. The average cost percentage is ($0.75 million / $4 million) * 100% = 18.75%.

Economies of Scope a Survey of a National Market Has