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CONSULTING PROJECT
Production Decisions at Harding Silicon Enterprises, Inc.
Harding Sil
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CONSULTING PROJECT
Production Decisions at Harding Silicon Enterprises, Inc.
Harding Silicon Enterprises, Inc. produces
less than 1% of the world’s supply of 32 MB 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 (i.e., its chips are just like every
other producers’ chips). 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 do not need to estimate TFC. 2. Recommend production
levels and forecast profits for two chip price scenarios: a. The price of 32 MB RAM chips reaches $62 per chip, and b. The
price of 32 MB 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 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. Month Monthly production of finished product Business licenses &
fees Insurance premiums Building lease payment Materials expenses Telephone Energy expenses Wage expense Nov-98
875 0 0 3570 9690 945 7230 12250 Dec-98 670 0 0 3570 6700 945 5115 8995 Jan-99 1675 6000 2200 3570 16295 945 12884
23106 Feb-99 1155 0 0 3570 11285 945 9240 15225 Mar-99 1845 0 0 3570 16550 945 14220 24530 Apr-99 1650 0 0 3570 16230 945
12700 21600 May-99 1955 0 0 3570 19626 945 15640 27484 Jun-99 2845 0 0 3570 27410 945 22760 39830 Jul-99 2265 0 2200 3570
20526 945 17244 31225 Aug-99 3470 0 0 3570 34176 830 25760 48564 Sep-99 3665 0 0 3570 36726 830 28720 50094 Oct-99 3750 0
0 3570 42576 830 32000 54474 Nov-99 4595 0 0 3570 48226 830 37260 66414 Dec-99 4060 0 0 3570 41095 830 33155 57840 Jan-00
3575 7200 2450 4200 34550 830 27400 50050 Feb-00 4380 0 0 4200 41800 830 34460 61320 Mar-00 5575 0 0 4200 81750 830 54600
82150 Apr-00 7870 0 0 4200 92360 830 102960 130180 May-00 6750 0 0 4200 89576 830 70000 109774 Cost Items for Harding
Silicon Enterprises, Inc. 1. 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 HSE’s future total fixed costs ($6,500 per month).]
Print out the 19 months of data on output (Q) and total variable cost (TVC) and average variable cost (AVC). b. 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. c. 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. d. 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). e. Evaluate the results of your regression equation in part a. Specifically discuss
algebraic signs of parameters, statistical significance, and goodness of fit. 2. a. How many chips should be produced
(monthly) if world chip prices are $62 per chip? Forecast the HSE’s profit at this output level. b. How many chips should
be produced (monthly) if world chip prices are $35 per chip? Forecast the profit at this output level. 3. At what price
should Harding shut down and produce no chips in the short run?
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