A phone manufacturer recently introduced a new smartphone. The company invested $100 million in equipment for the new design mold (the mold is malleable and can be sold for $20.0 million to be used on another project) and $10 million in a new microchip used specifically for the phone (not valuable to anyone else). Labor and the cost of materials necessary to make each phone is about $75.00. This year, a competitor has developed a similar phone that has significantly reduced demand for the new phone. Now, the original manufacturer is deciding whether they should continue production of the new phone.
a. What, if anything, can be viewed as a sunk cost?
b. What is the rule, as a function of quantity and price, as to whether this manufacturer should shut down?
c. If the estimated demand is 500,000 phones, what is the break-even price for phone?