Calculation of Average Costs with Economies of Scope Building Supplies is considering a merger with Tools and More.Building's total operating costs of producing services are $4 million for a sales volume of $20 million.Tools' total operating costs of producing services are $1 million for a sales volume of $5 million.Suppose that synergies in the production process result in a cost of production for the merged firms totaling $4.8 million with total sales remaining unchanged.Calculate the total average cost for the merged firm.

Question

Quizplus · Accepted Answer

To calculate the total average cost for the merged firm, we need to divide the total cost of production by the total sales volume:
Total average cost = Total cost of production / Total sales

Before the merger:
Building Supplies:
Total cost of production = $4 million
Total sales volume = $20 million
Average cost per unit = $4 million / $20 million = 0.2 or 20%

Tools and More:
Total cost of production = $1 million
Total sales volume = $5 million
Average cost per unit = $1 million / $5 million = 0.2 or 20%

After the merger:
Total cost of production = $4.8 million
Total sales volume = $25 million ($20 million + $5 million)

Total average cost = $4.8 million / $25 million = 0.192 or 19.2%

Therefore, the best answer is C) 19.2 percent.