Can anyone help me with question D and E? Thank you so much!
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Homework 6
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5. Period 1: Firm A (Pre-merger)
Assumptions:
Price = $4 per unit of output sold
Variable costs = $2.75 per unit of output
Fixed costs = $1,000,000
Firm A is producing 1,000,000 units of output per year
Firm A is producing at 50% of plant capacity
Period 2: Firm A (Post-merger)
Assumptions:
- Firm A acquires Firm B, which is producing 500,000 units of the same product per year
- Firm A closes Firm B's plant and transfers production to Firm A's plant
Price = $4 per unit of output sold
Variable costs = $2.75 per unit of output
Fixed costs = $1,000,000
a. Find the pre-merger profit. Show your work.
4 - 2.75 * 1,000,000 = 4 - 2,750,000 = -2,746,000
b. Find the pre-merger profit margin. Show your work.
-2,746,000 / 4,000,000 = -0.6865 or -68.65%
c. Find the pre-merger fixed cost per unit. Show your work.
1,000,000 / 1,000,000 = $1
d. Find the pre-merger margin per dollar of revenue. Show your work.
e. Find the post-merger profit. Show your work.
4 - 2.75 * 1,500,000 - 1,000,000 = 4 - 4,125,000 - 1,000,000 = -1,121,000
f. Find the post-merger profit margin. Show your work.
g. Find the post-merger fixed cost per unit. Show your work.
h. Find the post-merger margin per dollar of revenue. Show your work.
i. Explain the profit margin improvement. Show your work.