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?
A) 15.357 percent or lower
B) 15.357 percent or higher
C) 15.000 percent or lower
D) 10.000 percent or lower

Question

Quizplus · Accepted Answer

To justify the merger, JCC's average cost after acquiring AA and CHB should be lower than the weighted average cost of the three companies before the merger. The calculation is as follows: [(4 million * 10%) + (5 million * 20%) + (5 million * 15%)] / (4 million + 5 million + 5 million) = (0.4 million + 1 million + 0.75 million) / 14 million = 2.15 million / 14 million = 15.357 percent. Therefore, the average cost must be 15.357 percent or lower to justify the merger.

A Survey of a Local Market Provided the Following Average