Peter's TV Supplies is considering a merger with Jan's Radio Supply Stores.Peter's total operating costs of producing services are $330,000 for a sales volume (S_P)of $4.5 million.Jan's total operating costs of producing services are $30,000 for a sales volume (S_J)of $550,000.Suppose that synergies in the production process result in a cost of production for the merged firms totaling $360,000 for a sales volume of $5,050,000.Calculate the total average cost (TAC)for the merged firm.

Question

Quizplus · Accepted Answer

To calculate the total average cost (TAC) for the merged firm, we need to divide the total operating costs by the total sales volume:

TAC = Total operating costs / Total sales volume

Before the merger, Peter's TAC was:

TAC1 = Total operating costs / Sales volume1 
     = $330,000 / $4,500,000 
     = 0.0733 or 7.33%

And Jan's TAC was:

TAC2 = Total operating costs / Sales volume2 
     = $30,000 / $550,000 
     = 0.0545 or 5.45%

After the merger, the total operating costs and sales volume are:

Total operating costs = $360,000 
Total sales volume = $5,050,000

Therefore, the merged firm's TAC is:

TACm = Total operating costs / Total sales volume 
     = $360,000 / $5,050,000 
     = 0.0713 or 7.13%

Therefore, the best answer is C: 7.13 percent.

Peter's TV Supplies Is Considering a Merger with Jan's Radio