#### Question Details

(Answered)-This is graduate-level case study and please update excel with

This is graduate-level case study and please update excel with the answer

CASE #1

(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:

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. ABC believes its total fixed

costs will be $9,338 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 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

Nov-98

Dec-98

Jan-99

Feb-99

Mar-99

Apr-99

May-99

Jun-99

Jul-99

Aug-99

Sep-99

Oct-99

Nov-99

Dec-99

Jan-00

Feb-00

Mar-00

Apr-00

May-00

Building

Monthly Business

lease Materials

Energy

production of licenses Insurance

& fees premiums payment expenses Telephone expenses

finished product

1125

0

0

3770

9590

975

7130

920

0

0

6600

975

5015

3770

1925

16195

12784

6000

2200

975

3770

1405

0

0

11185

975

9140

3770

2095

16450

14120

0

0

975

3770

1900

0

0

16130

975

12600

3770

2205

19526

15540

0

0

975

3770

3095

0

0

27310

975

22660

3770

2515

20426

17144

0

2200

975

3770

3720

0

0

34076

850

25660

3770

3915

36626

28620

0

0

850

3770

4000

0

0

42476

850

31900

3770

4845

48126

37160

0

0

850

3770

4310

0

0

40995

850

33055

3770

3825

34450

27300

7200

2450

4400

850

4630

0

0

4400

41700

850

34360

5825

81650

54500

0

0

4400

850

8120

0

0

4400

92260

850

102860

7000

89476

69900

0

0

4400

850

Wage

expense

11950

8695

22806

14925

24230

21300

27184

39530

30925

48264

49794

54174

66114

57540

49750

61020

81850

129880

109474

1.

2.

3.

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).

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? (try to fit a trend line) 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? (Try to fit a trend line) 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

2

significance levels, and the R ).

e.

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.

b.

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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