George's Dry Cleaning is considering a merger with Weezzie's Laundry Supply Stores.George's total operating costs of producing services are $790,000 for sales volume (S_G)of $4.7 million.Weezzie's total operating costs of producing services are $202,000 for a sales volume (S_W)of $2.3 million.For a sales volume of $7 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 12 percent.

Question

Quizplus · Accepted Answer

The total average cost (TAC) for the merged firms is equal to the sum of the total operating costs of the two firms divided by the total sales volume of the merged firms.TAC = (TC_G + TC_W) / (S_G + S_W)where TC_G is the total operating costs of George's Dry Cleaning, TC_W is the total operating costs of Weezzie's Laundry Supply Stores, S_G is the sales volume of George's Dry Cleaning, and S_W is the sales volume of Weezzie's Laundry Supply Stores.Substituting the given values into the equation, we get:TAC = (790,000 + 202,000) / (4,700,000 + 2,300,000)= 992,000 / 7,000,000= 0.1417To reduce the TAC to 12%, we need to reduce the total operating costs by:(0.1417 - 0.12) * 7,000,000= 0.0217 * 7,000,000= $151,900Therefore, the merged firms need to experience a reduction in production costs of $151,900.

George's Dry Cleaning Is Considering a Merger with Weezzie's Laundry