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 XXXXXXXXXX XXXXXXXXXX
Dec XXXXXXXXXX XXXXXXXXXX
Jan XXXXXXXXXX XXXXXXXXXX 23106
Feb XXXXXXXXXX XXXXXXXXXX
Mar XXXXXXXXXX XXXXXXXXXX24530
Apr XXXXXXXXXX XXXXXXXXXX21600
May XXXXXXXXXX XXXXXXXXXX27484
Jun XXXXXXXXXX XXXXXXXXXX39830
Jul XXXXXXXXXX XXXXXXXXXX31225
Aug XXXXXXXXXX XXXXXXXXXX48564
Sep XXXXXXXXXX XXXXXXXXXX50094
Oct XXXXXXXXXX XXXXXXXXXX54474
Nov XXXXXXXXXX XXXXXXXXXX66414
Dec XXXXXXXXXX XXXXXXXXXX57840
Jan XXXXXXXXXX XXXXXXXXXX 50050
Feb XXXXXXXXXX XXXXXXXXXX61320
Mar XXXXXXXXXX XXXXXXXXXX82150
Apr XXXXXXXXXX XXXXXXXXXX130180
May XXXXXXXXXX XXXXXXXXXX109774
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 R
2
).
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?