Calculation of Average Costs with Economies of Scope Jewelry Designs is considering a merger with Beads Supply Stores.Jewelry's total operating costs of producing services are $300,000 for sales volume of $2 million.Beads' total operating costs of producing services are $125,000 for a sales volume (J_P)of $2.25 million.For a sales volume of $4.25 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 8 percent.

Question

Quizplus · Accepted Answer

To find the reduction in production costs, first calculate the total operating costs for both firms before the merger, which is $300,000 + $125,000 = $425,000. The total sales volume after the merger is $4.25 million. To achieve a total average cost (TAC) of 8%, the total costs should be 8% of $4.25 million, which is $340,000. Therefore, the reduction needed is $425,000 - $340,000 = $85,000.