George's Dry Cleaning is considering a merger with Weezzie's Laundry Supply Stores. George's total operating costs of producing services are $590,000 for sales volume (S_G) of $4.7 million. Weezzie's total operating costs of producing services are $152,000 for a sales volume (S_W) of $2.3 million. For a sales volume of $7 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 9%.

Question

Quizplus · Accepted Answer

First, we need to find the total operating costs for the merged firms at a sales volume of $7 million:

Total operating costs = George's operating costs + Weezzie's operating costs
Total operating costs = $590,000 + $152,000
Total operating costs = $742,000

To calculate the reduction in production costs needed for the merged firms to have a TAC of 9%, we can use the following formula:

TAC = Total operating costs / Sales volume
0.09 = $742,000 / $7,000,000

Solving for the total operating costs needed for a TAC of 9% at a sales volume of $7 million:

Total operating costs = TAC x Sales volume
Total operating costs = 0.09 x $7,000,000
Total operating costs = $630,000

Reduction in production costs needed:

Reduction in production costs = Total operating costs before - Total operating costs after
Reduction in production costs = ($590,000 + $152,000) - $630,000
Reduction in production costs = $112,000

Therefore, the answer is (C) $112,000.

George's Dry Cleaning Is Considering a Merger with Weezzie's Laundry