A Company Manufactures Chips Used in the Production of Computers

question 116

Short Answer

A company manufactures chips used in the production of computers. The chips can be purchased for $50 each from an outside vendor. It costs the manufacturer $60 a chip to produce them, of which 25% is fixed overhead cost. What are the relevant costs for this decision? Based on these costs, which option should the company choose? $\begin{array}{ll}\text { Relevant Costs }\\\text { (Purchase and Manufacture) } & \text { Decision }\\\text { a) } \$ 50 \text { and } \$ 45 & \text { Manufacture } \\\text { b) } \$ 50 \text { and } \$ 45 & \text { Purchase } \\\text { c) } \$ 45 \text { and } \$ 40 & \text { Purchase } \\\text { d) } \$ 45 \text { and } \$ 40 & \text { Manufacture }\end{array}$

---

Definitions:

AFC

stands for Average Fixed Cost, which is the fixed cost per unit of output, calculated by dividing total fixed costs by the quantity of output produced.

Output Rises

Refers to an increase in the production level of goods and services over a certain period.

Output Rises

An increase in the production of goods and services within an economy.

Consumer Surplus

The difference between what consumers are willing to pay for a good or service relative to its market price.