The Market Structure of the Low calorie Food Company
Assignment 2: Operations Decision
Due Week 6 and worth 300 points
Using the regression results and the other computations from Assignment 1, determine the market structure in which the low-calorie frozen, microwavable food company operates.
Use the Internet to research two (2) of the leading competitors in the low-calorie frozen, microwavable food industry, and take note of their pricing strategies, profitability, and their relationships within the industry (worldwide).
Write a six to eight (6-8) page paper in which you:
Outline a plan that will assess the effectiveness of the market structure for the company’s operations. Note: In Assignment 1, the assumption was that the market structure [or selling environment] was perfectly competitive and that the equilibrium price was to be determined by setting QD equal to QS. You are now aware of recent changes in the selling environment that suggest an imperfectly competitive market where your firm now has substantial market power in setting its own “optimal” price.
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.
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.
TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100 + 0.0126424Q
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. (Hint: Your firm’s price must cover average variable costs in the short run and average total costs in the long run to continue operations.)
Suggest one (1) pricing policy that will enable your low-calorie, frozen microwavable food company to maximize profits. Provide a rationale for your suggestion.
(Hints:
In Assignment 1, you determined your firm’s market demand equation. Now you need to find the inverse demand equation. Having found that, find the Total Revenue function for your firm (TR is P x Q). From your firm’s Total Revenue function, then find your Marginal Revenue (MR) function.
Use the profit maximization rule MR = MC to determine your optimal price and optimal output level now that you have market power. Compare these values with the values you generated in Assignment 1. Determine whether your price higher is or lower.)
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.
(Hints:
Calculate profit in the short run by using the price and output levels you generated in part 5. Optional: You may want to compare this to what profit would have been in Assignment 1 using the cost function provided here.
Calculate profit in the long run by using the output level you generated in part 5 and cost data in part 3 and assuming that the selling environment will likely be very competitive. Determine why this would be a valid assumption.)
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.
Use at least five (5) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic resource.
Your assignment must follow these formatting requirements:
Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
Operations Decision
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The Market Structure of the Low calorie Food Company
It is crystal clear from the regression results that the product is inelastic; market structure is of monopolistic competition market especially considering the elasticity of the 26 companies implying that a small proportion of the market share is controlled by each company. These companies’ products are slightly differentiated. The increase in the people’s income has made it possible for them to afford cheaper lifestyle and hence their changes in the cooking style.
The Leading Competitors in the Low-calorie Microwavable food Industry
Microwaves have not only replaced traditional methods of preparing food but also increased food items hence making it possible for one to easily choose a healthy microwavable food. A healthy food is one which has not more than 600 mg of sodium, 3gm of fiber for satiety and adequate protein. In the frozen food market, Lean Cuisine and Healthy Choice manufacture some of the options where both are competitors. Lean company is owned by Nestle and it has its market in U.S, Canada and Australia since its formation in 1981. Lean Cuisine is a leading choice for low calorie food and it offers a wide variety of frozen foods. Healthy Choice, on the other hand, is the biggest opponents to Lean Cuisine in this industry and they too offer low calorie food. Low calorie food market segment is determined by Behavioral, Profile, and Psychographic variables (Baron,2000).
Behavioral variables are sought from the product, buying patterns such as frequency and volume of purchase. Profile variables are necessary for deciding the target audience and one consider geographic locations as well as socio-economic group. Psychographic variables, on the other hand, are applied where purchasing behavioral of a consumer correlates with their lifestyle or personality. Consumers with varied personalities and lifestyle trends tend to be prejudiced towards certain products and hence their choices are dictated by their economic and social abilities.
Target audience is the key factor to consider while determining market structure for food the industry. The company’s motive and objective should also be set so as to determine in advance whether the company is targeting a local market only or both local and global market. The percentage population growth in U.S also determines the growth of the food industry. An increase in population will definitely increase sales in the food industry. Sale of microwaves has an effect in the food industry since they provide healthier food options.
Consumer behaviors are widely dependent upon the age, gender, social, economic and educational background of the people. In food industry, consumer behavior of the target consumers is crucial as well as the sale of microwave ovens since the more the number of microwave oven consumers, the higher the demand for frozen food will be. Educational awareness, tastes and preferences of the customers will also affect the sales.
Analyzing effectiveness of the market structure
How effective our market will be, would be dependent on the rise in demand and sales revenue generated through them. Food price increase will cause a decline in the quantity demanded mostly by a lesser than the proportionate amount due to its inelastic nature. Microwave oven is a luxury since its income elasticity is flexible and advertisement policy will play an essential role in its sales. According to cross elasticity explanations for substitute goods, if the demand will perpetually be positive then the demand for one good will rise if the price for its substitute increases. Fresh vegetables and frozen foods are substitutes, if while holding all the other factors constant price of frozen food increases, the quantity demanded for fresh vegetables will increase as consumers will tend to switch to it as an alternative.
Determining factors of change
Reduction of microwaves cost will attract more consumers to demand more frozen foods. This shows how important the cost of relative products and substitute goods is in market structure of commodities. Substitute goods will be adequately be provided through introduction of new firms in the market to increase competitiveness.
Long Run and Short run Cost of Production analysis
A company faces various costs in production which include raw material costs, short term, and long term fixed and variable expenses and labor costs. Land for setting up the manufacturing plant and cost of machinery are the long run production costs for low calorie microwavable food. Included in the short term costs are the variable costs and the costs only incurred for a short period of time during production. Costs such as advertising, taxes and those costs incurred once or in a while are short term costs.
Circumstances under the Company should discontinue Operations
Unsuccessful business which is unable to raise adequate revenue to cover its operations is likely to be discontinued. Losses will arise when the demand for company’s product lowers and revenue reduces immensely. A company will be discontinued from its operations where there is inadequate capital to support its operations and also to ensure its survival in the industry. Closing down of an enterprise will help reduce more debts and losses caused by the mere existence of it. Improper stock management will also lead to discontinuation of a company. Adequate stock is necessary to keep in balance demand as well as supply. A disruption of this equilibrium between supply and demand would see the company shutting down. Economies of scale coming from the company’s operations would also lead to the closure of the company. Incompetence on the management side in handling high demands of the company, running the company will be risk as it will not definitely meet all the demand. In a nutshell, therefore, competition, low sales, a financial crisis and lack of adequate managerial ability are the core basis for closing down a company (Wagner, 2005). In this case, the firm’s price must cover the average total costs in the long run and average variable costs in the short run in order to continue operations as shown below:
TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100 + 0.0126424Q
Short run