Two companies operate factories having virtually the same capacity and efficiency. They each have an equal share of the market for product X. New manufacturing technology would permit increased efficiency but would require twice the volume being produced by either company. The two companies contemplate a merger that would allow them to exploit the new technology. The operating costs would be reduced from an equivalent annual cost of €12.0 per unit to €9.6 per unit after tax, assuming combined total production remains the same at 2 million units.

(a) Estimate the potential merger benefits.

(b) How should the benefits be distributed between the companies?