Group Assignment #1 - Product Decisions
Instructions
For this group assignment, only one person from each group will need to submit/attach as a
Word document.
Forward integration or not?
Microchip-X is a company that specializes in producing microchips. It sells these microchips to
high-tech manufacturers of electronic control devices. The cost of producing a microchip is $30,
Microchip-X can sell the chips to other high-tech manufacturers for $55. Microchip-X can
produce, at most, 1 million microchips each year.
Suppose now that the workers' unions of many of the key high-tech manufacturers of
electronic control devices (Microchip-X's customers) go on strike. Under these new market
conditions, Microchip-X receives outside orders of only 800,000 units from the high-tech
manufacturers (at the same price of $55), and so it has some idle capacity.
As a result, the company is considering producing a certain electronic control device by itself.
Producing each control device involves putting in two microchips plus an additional $50 in labor
costs. To open this new product line, Microchip-X must rent a new plant, which costs $2 million
each year. It also needs to borrow $20 million as working capital (the annual interest rate is
5%). The company can sell each control device for $150.
(a) If Microchip-X opens the new product line, what are its profits from producing each control
device?
Should Microchip-X start the new product line to utilize its 200,000-unit unused
microchip capacity?
(b) Suppose that Microchip-X can now decline some outside orders of microchips if it wants to
produce more electronic control devices by itself.
What is the cost of producing an additional
electronic control device if Microchip-X uses more microchips than its 200,000-unit unused
capacity? Should Microchip-X decline any outside orders?
