A survey of a local market has provided the following average cost data:
Johnson Construction Corp. (JCC) has assets of $3 million and an average cost of 20 percent.
Anderson Architects (AA) has assets of $4 million and an average cost of 30 percent. Cole Home Builders (CHB) has assets of $4 million and an average cost of 25 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.
a. What should the average cost after the acquisition be for JCC to justify this merger?
b. If JCC plans to reduce operating costs by $500,000 after the merger, what will the average cost be for the new firm?