ABC Enterprises, Inc. produces less than 1% of the world’s supply of 32 MB rando
ID: 1210076 • Letter: A
Question
ABC Enterprises, Inc. produces less than 1% of the world’s supply of 32 MB random access memory (RAM) chips for electronic devices. ABC’s RAM chips perform according to globally accepted performance standards for this type of silicon chip (i.e., its chips are just like every other producers’ chips). ABC has hired you to do undertake three tasks:
Perform a statistical analysis of its short-run production costs to estimate its total variable cost function, average variable cost function, and marginal cost function. ABC believes its total fixed costs will be $9,338 per month, so you do not need to estimate TFC.
Recommend production levels and forecast profits for two chip price scenarios:
The price of 32 MB RAM chips reaches $62 per chip, and
The price of 32 MB RAM chips falls to $35 per chip.
Determine the price below which ABC should shut down operations in the short run.
ABC provides you with the following cost and output data for the past 19 months. Over this time period, inflation has been so low that you do not need to adjust the cost data for the effects of inflation (the CPI rose only 0.4% over the 19 month time period). Monthly output of chips is given in the second column, which is titled “Monthly production of finished product.” Costs are reported in seven categories (some are fixed costs and some are variable costs). HINT: Remember, cost items are part of fixed costs if the costs do not vary with output, even though fixed cost items may vary over time.
Cost Items for ABC Enterprises, Inc.
Month
Monthly production of finished product
Business licenses & fees
Insurance premiums
Building
lease payment
Materials expenses
Telephone
Energy expenses
Wage expense
Nov-98
1125
0
0
3770
9590
975
7130
11950
Dec-98
920
0
0
3770
6600
975
5015
8695
Jan-99
1925
6000
2200
3770
16195
975
12784
22806
Feb-99
1405
0
0
3770
11185
975
9140
14925
Mar-99
2095
0
0
3770
16450
975
14120
24230
Apr-99
1900
0
0
3770
16130
975
12600
21300
May-99
2205
0
0
3770
19526
975
15540
27184
Jun-99
3095
0
0
3770
27310
975
22660
39530
Jul-99
2515
0
2200
3770
20426
975
17144
30925
Aug-99
3720
0
0
3770
34076
850
25660
48264
Sep-99
3915
0
0
3770
36626
850
28620
49794
Oct-99
4000
0
0
3770
42476
850
31900
54174
Nov-99
4845
0
0
3770
48126
850
37160
66114
Dec-99
4310
0
0
3770
40995
850
33055
57540
Jan-00
3825
7200
2450
4400
34450
850
27300
49750
Feb-00
4630
0
0
4400
41700
850
34360
61020
Mar-00
5825
0
0
4400
81650
850
54500
81850
Apr-00
8120
0
0
4400
92260
850
102860
129880
May-00
7000
0
0
4400
89476
850
69900
109474
a. Compute total variable cost (TVC) by adding the appropriate columns of cost items. Compute average variable cost (AVC). [Remember that you are given an estimate of ABC’s future total fixed costs ($9,338 per month).] Print out the 19 months of data on output (Q) and total variable cost (TVC) and average variable cost (AVC).
Plot a scatter diagram of TVC on the vertical axis and Q on the horizontal axis. Does the scatter diagram suggest a functional form for TVC? (try to fit a trend line) Explain briefly.
Plot a scatter diagram of AVC on the vertical axis and Q on the horizontal axis. Does the scatter diagram suggest a functional form for AVC? (Try to fit a trend line) Explain briefly.
Estimate a quadratic AVC function. Present the estimated equation and evaluate the regression results (i.e., discuss the algebraic signs of the parameter estimates, the significance levels, and the R2).
Evaluate the results of your regression equation in part a. Specifically discuss algebraic signs of parameters, statistical significance, and goodness of fit.
a. How many chips should be produced (monthly) if world chip prices are $62 per chip? Forecast the ABC’s profit at this output level.
How many chips should be produced (monthly) if world chip prices are $35 per chip? Forecast the profit at this output level.
At what price should ABC shut down and produce no chips in the short run?
Cost Items for ABC Enterprises, Inc.
Month
Monthly production of finished product
Business licenses & fees
Insurance premiums
Building
lease payment
Materials expenses
Telephone
Energy expenses
Wage expense
Nov-98
1125
0
0
3770
9590
975
7130
11950
Dec-98
920
0
0
3770
6600
975
5015
8695
Jan-99
1925
6000
2200
3770
16195
975
12784
22806
Feb-99
1405
0
0
3770
11185
975
9140
14925
Mar-99
2095
0
0
3770
16450
975
14120
24230
Apr-99
1900
0
0
3770
16130
975
12600
21300
May-99
2205
0
0
3770
19526
975
15540
27184
Jun-99
3095
0
0
3770
27310
975
22660
39530
Jul-99
2515
0
2200
3770
20426
975
17144
30925
Aug-99
3720
0
0
3770
34076
850
25660
48264
Sep-99
3915
0
0
3770
36626
850
28620
49794
Oct-99
4000
0
0
3770
42476
850
31900
54174
Nov-99
4845
0
0
3770
48126
850
37160
66114
Dec-99
4310
0
0
3770
40995
850
33055
57540
Jan-00
3825
7200
2450
4400
34450
850
27300
49750
Feb-00
4630
0
0
4400
41700
850
34360
61020
Mar-00
5825
0
0
4400
81650
850
54500
81850
Apr-00
8120
0
0
4400
92260
850
102860
129880
May-00
7000
0
0
4400
89476
850
69900
109474
Explanation / Answer
At what price should ABC shut down and produce no chips in the short run?