The Microchip Division of Silicon Computers Produces Computer Chips That

question 28

Essay

The Microchip Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders.Operating data for the Microchip Division for 20X5 are as follows:
$$\begin{array} { | l | r | r | } \hline & \text { Internal Sales } & \text { External Sales } \\\hline \text { Sales: } & & \\\hline 300,000 \text { chips at } \$ 10 & \$ 3,000,000 & \\\hline 200,000 \text { chips at } \$ 12 & & \$ 2,400,000 \\\hline \text { Variable expenses at } \$ 4 & 1,200,000 & \underline { 800,000 } \\\hline \text { Contribution margin } & \$ 1,800,000 & \$ 1,600,000 \\\hline \text { Fixed cost (allocated in units) } & 1,500,000 & 1,000,000 \\\hline \text { Operating income } & \$ 300,000 & \$ 600,000 \\\hline\end{array}$$ The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.90 each.The manager of Microchip Division is not willing to meet the $8.90 price.She argues that it costs her $9.00 to produce and sell each chip.Sales to outside customers are at a maximum of 200,000 chips.
Required:
a.Verify the Microchip Division's $9.00 unit cost figure.
b.Should the Microchip Division meet the outside price of $8.90? Explain.
c.Could the $8.60 price be met and still show a profit for the Microchip Division sales to the Personal Computer Division? Show computations.

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Definitions:

Economic Profits

The difference between total revenue and total costs, including both explicit and implicit costs, representing excess revenue over the opportunity cost of resources employed.

Competitive Equilibrium

A state in a market where supply equals demand, leading to an optimal distribution of goods and services among participants.

Constant-cost Industries

Industries where the costs of production do not change significantly with an increase or decrease in the quantity produced.

Economic Efficiency

A condition where resources are allocated in a way that maximizes the production of goods and services, and minimizes waste and inefficiency.