The following information is available on the average costs of the three major banks in a given local market.Bank A has assets of $10 million and average costs are 15 percent,Bank B has assets of $20 million and average costs of 13 percent while Bank C has assets of $30 million with average costs of 12 percent.Average costs are measured as a proportion of total assets.

By how much should operating costs of the combined entity (Bank A + Bank B)be reduced in order to stay competitive in the local market,ceteris paribus?
A)$900,000.
B)$600,000.
C)$500,000.
D)$400,000.

Question

The following information is available on the average costs of the three major banks in a given local market.Bank A has assets of $10 million and average costs are 15 percent,Bank B has assets of $20 million and average costs of 13 percent while Bank C has assets of $30 million with average costs of 12 percent.Average costs are measured as a proportion of total assets.

By how much should operating costs of the combined entity (Bank A + Bank B) be reduced in order to stay competitive in the local market,ceteris paribus?

By how much should operating costs of the combined entity (Bank A + Bank B)be reduced in order to stay competitive in the local market,ceteris paribus?
A)$900,000.
B)$600,000.
C)$500,000.
D)$400,000.

Quizplus · Accepted Answer

AC of combined Bank BA should = 0.12: TA * 0.12 = $30 * 0.12 = $3.6
TC of combined Bank BA = $4.1
 Costs should be reduced by ($4.1 - $3.6)= $0.50 or $500,000.

The Following Information Is Available on the Average Costs of the Three