Economies of Scope A survey of a local market provided the following average cost data: Johnson Construction Corp.(JCC)has assets of $4 million and an average cost of 10 percent; Anderson Architects (AA)has assets of $5 million and an average cost of 20 percent; Cole Home Builders (CHB)has assets of $5 million and an average cost of 15 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.
What should be the average cost after the acquisition for JCC to justify this merger?

Question

Quizplus · Accepted Answer

To justify the merger, JCC must reduce its overall average costs. The average cost after the acquisition can be calculated as (JCC's cost before the merger * JCC's assets before the merger + AA's cost before the merger * AA's assets before the merger + CHB's cost before the merger * CHB's assets before the merger) divided by (JCC's assets before the merger + AA's assets before the merger + CHB's assets before the merger).

Plugging in the values, we get (0.10 * 4 million + 0.20 * 5 million + 0.15 * 5 million) / (4 million + 5 million + 5 million) = 0.15 = 15%.

Therefore, to justify the merger, the new average cost for JCC must be lower than 15%. The only option that meets this requirement is A, 15.357% or lower.

Economies of Scope a Survey of a Local Market Provided