Operations Decision

  • Outline a plan that will assess the effectiveness of the market structure for the company’s operations.

The recent years have seen a rise in the number of low-calorie microwavable food options. Income raises lead to increased ability of the households to afford better lifestyle, thus a change in their cooking methods. People are using microwaves than never before, which translates into a rise in the amount of food items consumers buy. Such abundance of food products include those manufactured by Lean Cuisine and Healthy Choice, who are competitors in the same market of frozen foods. The demand for microwavable foods product has increased as more parent stay away from home due to work-related activities and households look for convenience in preparing their food.

The market for the low-calorie microwavable foods is determined by three factors, behavioral, profile, and psychographic variable. Psychographic variables are applied when a household’s buying behavior correlates with their lifestyle or personality. As such, some consumers are bound to be biased towards certain commodities based on their lifestyles and personalities. Therefore, their choices would be determined by their social and economic standing.

Behavioral variables, on the other hand, involve the variables sought from a product and the underlying buying patterns, such as volume and frequency of purchase. Behavioral variables might include ready to buy, usage rate, and brand loyalty, which are based on the actual customer behavior towards low-calorie microwavable foods. Profiling variable, however, are not that important in the market segmentation although they would be necessary in this plan to decide the target audience through such things as geographic location and socio-economic group. Therefore, the company would have to decide upon both the market differences and channels.

To determine the market structure for the low-calorie foods industry, one would bear in mind the target audience by studying the economic growth of the whole industry. The company should decide upon the scale of operation regarding the market it will cater for, for instance, global, national, or local. Such should go hand in hand with an objective and motive for growth of the company. The psychographic segmentation would be based on consumer groups’ lifestyles, opinions, interests, and activities. Profile variables would be crucial in differentiating the target audience based on location and economic status.

By setting QD equal to QS

QD + 38,650 – 42P

QS = 7910 + 79.10P

From the equation; MC / supply function Q = -7909.89 + 79.1P

QD =-5,200 + 20Px + 0.20A + 5.2I + 0.25M

= -5,200 + 20(600) + 0.20(10,000) + 5.2(5,500) + 0.25(5,000)

= 38,650 = QD intercept

QD + 38,650 – 42P

QS = 7910 + 79.10P

QS = QD to get the equilibrium price

7610 + 79.10P = 38,650 + 42P

Pe = 384.48 cents.

Equilibrium quantity, QD = 38,650 – 42P

= 38650-42(384.48)

Qe = 22,502 units

The equilibrium price represents the point of interception between the QD and QS

= 22,502 units at 384.48 cents

  • Given that business operations have changed from the market structure specified in the original scenario in Assignment 1, determine two (2) likely factors that might have caused the change. Predict the primary manner in which this change would likely impact business operations in the new market environment.

Changes in the market could result from a decrease in the number of companies in the industry. Fewer companies would result to controlling the prices of the commodities and thus the structure shifts from a monopolistic competition to an oligopolistic competition. With an oligopolistic competitive market, there are few companies with each looking to monitor the competition using their prices, production and new commodities. Therefore, as all the companies seek to adjust prices to compete, a reduction in the profits would occur just as the same as if an oligopolistic market producing the same product (Goodwin et al., 2015).

As such, monopolistic markets would to become innovative by producing different products to differentiate themselves from other firms. The change in demand would thus result from changes in consumer incomes, changes in the competitors’ prices, or changes in the prices of the goods used. Therefore, changes in the market structures would impact business operations as the company would know the markets and competitors to increase profitability.

  • Analyze the major short run and long cost functions for the low-calorie, frozen microwaveable food company given the cost functions below. Suggest substantive ways in which the low-calorie food company may use this information in order to make decisions in both the short-run and the long-run.

In the short-term, a monopolistic competition the prices are greater than the marginal costs. As such, the company would fail to generate profits in the short run. New companies entering the industry would cause an increase in the supply of the low-calorie microwavable food thereby causing a fall in the equilibrium price. The demand curve would thus show the decline in the equilibrium price. Further, in a monopolistic competition, there is free entry and exit of firms, which means a fluctuation in the prices as well as the demand for the firms that have stayed in the market for a long time.

In the long-run, the marginal revenue would equal the marginal cost. The profits would be zero as consumers get persuaded elsewhere. For the firm to be profitable, they will have to set prices that are greater than the average total price cost.

Therefore, in both the long-run and short-run, the firm’s would have to meet the average total costs and the average variable costs respectively to continue being in business.

Total Cost: TC = 160,000,000 + 100Q + 0.0063212Q2

Variable Cost: VC = 100Q + 0.0063212Q2

Marginal Cost: MC =100 + 0.0126424Q

160000000/Q + 115 + 0.0063212Q

Q= 115 + 0.0126424

= 125,005

Value of ATC

160,000,000/125,005 + 115 + 0.0063212

Q1333.26 + 115 + (0.0063212 x125, 005)

AVC= -115.56- 0.0063212Q=1217.70

  • Determine the possible circumstances under which the company should discontinue operations. Suggest key actions that management should take in order to confront these circumstances. Provide a rationale for your response.

Circumstances under which the company should discontinue operations include the inability to compete with other firms in terms of prices and innovation. Further, inadequate funding could lead the company to close down operations or some crucial supplies are unavailable. As such, inadequate capital, fierce competition, and lack of supplies would involve the reasons the company might discontinue operations.

To counter these circumstances, the company should know its competitors’ products and prices. Such would ensure that the company remains profitable since it would have something for the consumers who might lose interest in its products. The management should ensure that there are enough supplies to ensure that customers do not miss out. It should also remain innovative and charge fair prices to get hold of the loyal customers. It should ensure that there is enough capital for further investment.

  • Suggest one (1) pricing policy that will enable your low-calorie, frozen microwavable food company to maximize profits. Provide a rationale for your suggestion.

For the low-calorie microwavable food products, one would suggest the marginal cost pricing. Such would include setting the price to be equal to the extra cost of producing an extra unit of output. The company would charge only the additional cost to the total costs from direct labor and materials, for each unit produced. The businesses usually set prices close to the margin cost when they are experiencing poor sales. Therefore, to keep the company profitable, the prices should be greater than the average total cost at the highest level of output. Additionally, the firm’s prices should cover the average costs in the short run and cover the average total costs in the long run (Krystallis & Ghrysochou, 2011).

Therefore, the demand for the low calorie frozen food is inelastic. As such, an increase in the price would result in a fall in the quantity bought.

  • Outline a plan, based on the information provided in the scenario, which the company could use in order to evaluate its financial performance. Consider all the key drivers of performance, such as company profit or loss for both the short term and long term, and the fundamental manner in which each factor influences managerial decisions.

A company in a monopolistic industry operates with high profits, which lures new companies to enter into the industry. Therefore, for the company to continue operating in the monopolistic position, it should invest in advertising and promotion. Such investments would at first dent the company’s profits but would protect the company from losing customers to new and innovative entrants into the market. Therefore, the market’s output will increase as market prices go down. As such, it would be difficult for the company to sustain profitability as variable costs change in the short run with the monopolistic market being efficient. The competitors, on the other hand, have the market power similar to monopolies, which would produce high levels of profits and thus a loss in producer and consumer surplus.

For the monopolistic company to maximize its profit in the long run, the demand curve of the firm in a monopolistic competitive market will shift so that it is tangent to the firm’s average total cost curve. This will make it difficult for the firm to make a profit and breakeven.

Profits will be realized when the market prices exceed average cost. With the price being less than the average cost, the firm in the long run, will operate at a loss and thus leave the market (Mcguigan, 2016).

  • Recommend two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders. Outline, in brief, a plan to implement your recommendations.

To improve profitability and deliver more value to its stakeholders, the company should revamp its marketing strategy. The management should be ready to spend to get more customers and beat the competition. Such could be done through advertising to showcase to the markets what the company has that differentiates from competition. Consumers would also know that the company is not trying to cut back on expenses.

The second recommendation would entail maintaining innovation, which would include being a step ahead of competition. As such, adapting to change would be necessary, and such would involve listening and paying close attention to the consumers’ preferences. The company could get creative and introduce gluten-free products as an extension to its product lines. Aggressive and continued promotion would ensure that the company’s products are fresh in the minds of consumers to ensure loyalty.

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