Dod Electronics manufactures various RFID (radio-frequency identification) chips for medical device companies. The RFID chips track the location and movement of medical personnel. A nonmedical device company, Xtron Systems, has approached Dod Electronics for a one-time special order of 10,000 RFID chips. The RFID chip that Xtron is seeking to purchase is virtually identical to Dod's existing RFID chip model FQ4503. The Dod manufacturing cell that produces model FQ4503 currently is producing 60,000 FQ4503 chips for medical customers and has excess capacity to run the 10,000 special order without disrupting Dod's regular production/delivery schedule. Xtron will purchase the chips for $38 per chip. If Dod accepts this special order, assume that it will have NO impact on the pricing of Dod's existing FQ4503 contracts/customers. Dod's average cost of producing its current level of 60,000 RFID chips is $35 per chip. Management does not know precisely what it will cost to produce the extra 10,000 chips for Xtron.
Required:
a. Management is very confident that the average cost of FQ4503 chips is falling at their current production level of 60,000. Should Dod accept Xtron's offer to purchase the 10,000 chips for $38 per chip? Explain the logic supporting your answer.
b. Management is very confident that the average cost of FQ4503 chips is rising at their current production level of 60,000. Should Dod accept Xtron's offer to purchase the 10,000 chips for $38 per chip? Explain the logic supporting your answer.