Economies of Scope A survey of a national market provided the following average cost data: Jackson County Construction (JCC)has assets of $2 million and an average cost of 30 percent; Arkansas Architects (AA)has assets of $1.5 million and an average cost of 20 percent; Colorado Home Builders (CHB)has assets of $500,000 and an average cost of 10 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 $200,000 after the merger,what will the average cost be for the new firm?

Question

Quizplus · Accepted Answer

First, we need to calculate the total assets of the new firm after the acquisition:

Total assets = $2 million (JCC) + $1.5 million (AA) + $500,000 (CHB) 
= $4 million

Next, we need to calculate the total cost savings that JCC hopes to achieve through the acquisition:

Total cost savings = $200,000

We can now calculate the new average cost for the merged firm:

New average cost = Total cost / Total assets 
= ($2 million x 0.3) + ($1.5 million x 0.2) + ($500,000 x 0.1) - $200,000 / $4 million 
= 19.74 percent

However, this is not one of the answer choices. We need to adjust the calculation by finding the new average cost per dollar of assets:

New average cost per dollar of assets = ($2 million x 0.3) + ($1.5 million x 0.2) + ($500,000 x 0.1) - $200,000 / $4 million 
= 0.1875 or 18.75 percent

Therefore, the answer is A) 18.75 percent.

Economies of Scope a Survey of a National Market Provided