A survey of a local market has provided the following average cost data: Mortgage Bank A (MBA) has assets of $3 million and an average cost of 20 percent. Life Insurance Company B (LICB) has assets of $4 million and an average cost of 30 percent. Corporate Pension Fund C (CPFC) has assets of $4 million and an average cost of 25 percent. For each firm, average costs are measured as a proportion of assets. MBA is planning to acquire LICB and CPFC with the expectation of reducing overall average costs by eliminating the duplication of services.
a. What should be the average cost after acquisition for the bank to justify this merger?
b. If MBA plans to reduce operating costs by $500,000 after the merger, what will be the average cost of the new firm?