Definitely demented! Given the formidable nature of the opposition, the PCs may need more assistance than just the chief elf.
It'd be even more fun if the Santa's Village was less corrupted and actively in the process of creating and delivering Christmas gifts to all mutants and humans within travel range ... whether they wanted the presents or knew about Christmas or not. The assorted foes would still attempt to hinder the PCs, but they'd target those on the "Naughty List" first. How do you get on the Naughty List? It isn't quite clear, and it is possible to be on both the Naughty List and the Nice List at the same time. Various groups of robots have different lists, some "punishing" and others assisting the PCs, or maybe changing their minds midway through whichever they're doing at the moment.
The Grinch AI wants to "keep Christmas from coming," whatever that means now that the Santa AI is attempting to turn the Village into an army with which to coerce the surrounding population. It may help the PCs despite the fact that it is evil, since they and it have a common enemy. So ... what does that look like? Especially since Grinch isn't up against Cindy Lou Who but a military computer with a growing army of robots armed with high-tech weaponry? But since it is evil, the Grinch might betray the PCs at some point or worse. What would trigger double-dealing and what form would it take?
Another force in the situation:
The Mouse King. He's a massive seven-headed mutant skilled with sword and musket who has determined not to stop Christmas but to seize it all for himself. If he succeeds he'll have access to the Santa's technology instead of just the black powder arsenal he currently has. He troops are smaller and less tough than the PCs, but there's literally a horde of them, they're extremely agile and, yes, they are in fact graceful ballet dancers.
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