CONSULTING PROJECT PRODUCTION DECISIONS AT HARDING SILICON ENTERPRISES, INC.

QUESTION

CONSULTING
PROJECT
PRODUCTION
DECISIONS AT HARDING SILICON ENTERPRISES, INC.

Harding Silicon Enterprises, Inc. produces less than 1% of the world’s
supply of 12 GB random access memory (RAM) chips for electronic devices. HSE’s
RAM chips perform according to globally accepted performance standards for this
type of silicon chip. HSE has hired you to do undertake three tasks:
1.
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. HSE believes its total fixed costs
will be $6,500 per month, so you no not need to estimate total fixed costs
(TFC).
2.
Recommend production levels and forecast profits
for two chip price scenarios:
a.
The price of 12 GB RAM chips reaches $62 per
chip,
b.
The price of 12 GB RAM chips falls to $35 per
chip.
3.
Determine the price below which HSE should shut
down operations in the short run.

HSE 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 title “Monthly production of finished product.” Costs
are reported in seven categories (some of these costs 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.

1.
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 HSE’s future total fixed costs
($6,500 per month)].
2.
Prepare a new list with the 19 months of data on
output (Q) and total variable cost (TVC) and average variable cost (AVC).
3.
Run a regression and discuss algebraic signs of
parameters, statistical significance, and goodness of fit.
4.
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? Explain briefly.
5.
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? Explain briefly.
6.
Do you think AVC can be represented using a
quadratic function? If yes, estimate it.
7.
How many chips should be produced (monthly) if
world chip prices are $62 per chip? Forecast the HSE’s profit at this output
level.
8.
How many chips should be produced (monthly) if
world chip prices are $35 per chip? Forecast the profit at this output level.
9.
At what price should Harding shut down and
produce no chips in the short run?

Cost Items for Harding
Silicon Enterprises, Inc.

Month

Monthly Production of Finished Product

Business licenses & fees

Insurance premiums

Building lease payment

Materials expenses

Telephone

Energy expenses

Wage expense

1

875

0

0

3570

9690

945

7230

12250

2

670

0

0

3570

6700

945

5115

8995

3

1675

6000

2200

3570

16295

945

12884

23103

4

1155

0

0

3570

11285

945

9240

15225

5

1845

0

0

3570

16550

945

14220

24530

6

1650

0

0

3570

16230

945

12700

21600

7

1955

0

0

3570

19626

945

15640

27484

8

2845

0

0

3570

27410

945

22760

39830

9

2265

0

2200

3570

20526

945

17244

31225

10

3470

0

0

3570

34176

830

25760

48564

11

3665

0

0

3570

36726

830

28720

50094

12

3750

0

0

3570

42576

830

32000

54474

13

4595

0

0

3570

48226

830

37260

66414

14

4060

0

0

3570

41095

830

33155

57840

15

3575

7200

2450

4200

34550

830

27400

50050

16

4380

0

0

4200

41800

830

34460

61320

17

5575

0

0

4200

81750

830

54600

82150

18

7870

0

0

4200

92360

830

102960

130180

19

6750

0

0

4200

89576

830

70000

109774

 

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