A survey of a local market has provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $3 million and an average cost of 22 percent. Anderson Architects (AA) has assets of $4 million and an average cost of 31 percent. Cole Home Builders (CHB) has assets of $5 million and an average cost of 28 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 $500,000 after the merger, what will the average cost be for the new firm?

Question

Quizplus · Accepted Answer

The correct answer is A.The average cost of the new firm can be calculated as follows:Average cost = (Total assets * Average cost of each firm) / Total assetsTotal assets = $3 million + $4 million + $5 million = $12 millionAverage cost of each firm = (22% + 31% + 28%) / 3 = 27%Average cost = ($12 million * 27%) / $12 million = 27%The new firm plans to reduce operating costs by $500,000, which will reduce the average cost to 27% - ($500,000 / $12 million) = 23.33%.

A Survey of a Local Market Has Provided the Following