This is graduate-level case study and please update excel with the answer
(BE CAREFUL!!!DATA SET IS DIFFERENT THAN CLASS EXAMPLES!!!)
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.
production of licenses Insurance
& fees premiums payment expenses Telephone expenses
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
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
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 ).
Evaluate the results of your regression equation in part a. Specifically discuss algebraic
signs of parameters, statistical significance, and goodness of fit.
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?
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