A company produces two main products: electronic control devices and specialty microchips. The average total cost of producing a microchip is $300; the firm then sells the chips to other high-tech manufacturers for $550. Currently, there are enough orders for microchips to keep its factory capacity fully utilized. The company also uses its own chips in the production of control devices. The average total cost (AC) of producing such a device is $500 plus the cost of two microchips. (Assume all of the $500 cost is variable and AC is constant at different output volumes.) Each control device sells for an average price of $1,500.
a. Should the company produce control devices? Is this product profitable?
b. Answer part (a) assuming outside orders for microchips are insufficient to keep the firm’s production capacity fully utilized.
c. Now suppose $200 of the average cost of control devices is fixed. Assume, as in part (a), that microchip capacity is fully utilized. Should control devices be produced in the short run? Explain.