A survey of a local market provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $5 million and an average cost of 15 percent; Anderson Architects (AA) has assets of $8 million and an average cost of 20 percent; Cole Home Builders (CHB) has assets of $8 million and an average cost of 17 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 $300,000 after the merger, what will the average cost be for the new firm?
A) 16.238 percent
B) 15.00 percent
C) 17.33 percent
D) 17.667 percent

Question

Quizplus · Accepted Answer

To calculate the new average cost, first determine the total costs and assets before the merger. JCC's costs are $750,000 (15% of $5 million), AA's costs are $1.6 million (20% of $8 million), and CHB's costs are $1.36 million (17% of $8 million). The total costs are $3.71 million, and the total assets are $21 million. After reducing operating costs by $300,000, the new costs are $3.41 million. The new average cost is $3.41 million / $21 million = 16.238%.

A Survey of a Local Market Provided the Following Average