This is exactly the approach I use, with one additional step. After all the parts have been merged into the single new part, I export it as a new STEP file, and then bring it back in again to another part. I don't want the any evidence of the original assembly left around (ghost objects in Windchill).
I've even gone so far as to create a simple SmartAssembly (3rd party automation program) that does this for me. It simply iterates through each model in the assembly and adds a merge feature to the newly created model.