Week 9 Assignment

Operations Decision

Monieke Woods

ECO: 550

Dr. Elu

August 13, 2017

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.

Healthy choice and Lean Cuisine are the two top low-calorie frozen microwavable foods providers operating under the monopolistic competition market structure. The market structure is characterized by few dominant firms and the large number of competitive fringe firms. The paper discusses on the competitive market structures outlining a plan that will assess the effectiveness of the market structure for the operations of the organization. I have established two main factors likely to cause changes in the market structures and analyzed both the short and long run cost functions for the company given certain cost functions.

There exist substantive ways in which the company can use the information to make decisions for both its short and long run operations and determining the possible circumstances in which the company should discontinue its operations. The plan outlines a way to maximize and evaluate its financial performance recommending two actions to help improve their profitability and deliver more value to their stakeholders.

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.

The low calorie frozen microwavable industry seems to operate under a monopolistic competitive market structure with ‘a few dominant firms and a large number of competitive fringe firms’ (Mcguigan, Moyer, & Harris, 2014, p352).

Smart ones exist as the third provider joining competitive market of providing low-calorie frozen microwavable foodstuffs (Boyle, 2014). In this type of market structure, the first thing that should be done to assess the effectiveness is to determine the substitutability of the different products. In this case the products should be close but not perfect substitutes for one another. With low-calorie foods, there will always be close relations because it is based on what each person desires and prefers to take in place of the other. Existence of barefaced barriers needs to be evaluated to understand how difficult or easy it is for any entry and exit of companies in such market structure. In this market structure, prices are reported to vary widely with unlimited quantities available in the market. The market structure operates without any price marker and each competes to gain the favor of customers over the other.

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 short run and long run, functions are determined from the Average Total Cost.

TC= 160,000,000 + 100Q + 0.0063212Q2 VC= 100Q + 0.0063212Q2 and MC= 100 + 0.0126424Q

Hence in using the predetermined values for the equation TC/Q

ATC= 160,000,000/Q + 100Q/Q + 0.0063212Q2/Q = 160,000,000/Q + 100 + 0.0063212Q

AVC= TVC/Q= 100Q/Q + 0.0063212Q2= 100 + 0.0063212Q

To find Q we set ATC=MC HENCE;

160,000,000/Q+ 100 + 0.0063212Q = 100 + 0.0126424Q

160,000,000/Q +0.0063212Q = 0.0126424Q

SUBTRACT 100 ON BOTT SIDES to find 160,000,000=0.0063212Q2; later subtract 0.0063212Q from both sides before multiplying each side by Q to have 25,311,649,686.786=Q2; square root on both sides to get rid of the Q2 hence Q=159,096.353

Q=159,096.353 refers to the output required to get to the breakeven point used to decide how good or bad the company is doing during the short run and long run for its survival in the market.

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.)

The cost functions are used in determining the profitability of the company and in making the decisions whether to exit or continue operating in the market. The ATC function is used to decide when it’s time to exit the market or when to concentrate in its operations maximizing its profits.

160,000,000/159,096.353 + 100 + .00632212 (159,096.353) =2011.36 taking that at 2011.36 cents and lower the company goes at break even where they are not covering for their total fixed costs. In the company reaching where their profit is equal to a negative total fixed cost, they will need to shut down determined using the profit and total revenues functions.

Profit (π) =total revenue – total cost (TC). Revenue resulting to be to be equal to P*Q and total cost equal to total fixed cost – total variable cost. Shut down point would thus be π = (P*Q) – TFC- (AVC * Q).

The management knows which products to sell at full price for the funds to cover for both the variable and the fixed costs.

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

Inverse demand function is used in the determining of the pricing policy that will maximize the profits.

Qd=350,000 – 100 P to determine the inverse demand function requires we simply divide both sides by 100 to have the equation P = 3500 - 0.01 Q. next we determine the total revenue that is P*Q where Q equals 3500Q – 0.01Q2, realizing a marginal revenue of 3500-0.02Q. The marginal revenue MR has to equal to Marginal cost MC for the maximization of profits. 3500 – 0.02 Q= 100 + 0.0126424 with Q equaling 104159.008. This means that a profit would be maximized when the company outputs 104159 units. In finding the price to maximize profits, we have to solve for P through the known value of Q. i.e. P = 3500 – 0.01 (104159.008) so as to have p= 2458.41 cents. Setting a high price is not feasible as much as one requires much money from a transaction. (Weinclaw, 2008). Multi-unit or non-linear pricing is where the price per unit varies with the number of units purchased which is the most preferable pricing of the product. The pricing assists in marketing of the product because of the many similarly related products in the market. Consumers will prefer a more appealing deal hence work out for individuals buying more than one to make sure they are getting the deal (McCannon, 2008, p 135).

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.

The company has to use short run and long run functions to see where its profitability lies to find out the best financial performances. We simply have to enter the value for Q into our equation which will give us ATC= 160,000,000/104159.008 + 100 + 0.0063212 (104159.008) which equals 2294.523. This means that we are spending $22.95 to make our product, and the price is $24.58. That means we are making a profit, then we need to do a profit analysis using the total revenue and total cost. TR= 2458.410*104159.008=256065546.857.

Total cost is ATC*Q which is 2294.523*104159.008=238995239.513 hence profitability is TR-TC, which in our case is 256065546.857-238995239513=17070307.344. These profits are not outstanding, but they are good in the short run. In the long run, the profitability that the company has will be less because the market will become even more saturated. Individuals will then tend to affiliate for the profits before the profitability scoops as low as zero.

The company can improve profitability is to try and focus as much money and energy as we can on our best sellers. There is a principle that says, “80% of your profit is gained from 20% of your products” (Bgateway, 2014). If that rule is true, then the company should make sure the products in that 20% is marketed in the best way. Reduction of costs helps out in increasing profitability as well as is the pushing for the products to the maximum to ensure there is always money coming in because they are products of high demand. Reviewing of processes to aid in minimization of wastes and renegotiating of deals with the current suppliers would help in cutting down of costs. During implementation, all the company partners need to be aware and incorporated in the overall decision making of the organization. Marketing departments are insisted upon to focus substantial energy on the main profitable products to ensure they are selling out at maximum levels. Renegotiation with current suppliers should be done effectively to reduce on the supplying charges or rather change the supplying vendors to much cheaper options. Outsourcing the evaluation procedures helps to find the existing loopholes leading to high wastages and help implement sustainable plans which would help conserve the business operations. Continuous assessment and training should be incorporated in any businesses to ensure the employees remain relevant and up to date with the existing organizational trends, for the effective running of the organization.

The most crucial aspect in an operating company is making profits hence lack of profits should lead to the closure and shutdown of an operating organization since it is not able to meet the costs and funding for their product in the market. In the perfect competitive market, all companies have equal market share and are therefore having an equal chance in thriving and becoming the head. However, in the real business world, perfect competitive markets are rare and extremely virtual hence requiring companies in the real world to do all the best so as to stand out amongst its rival competitors. Winning in of the customers is the only way a company can remain relevant in the market holding the competitive advantage over all other companies. Brand diehards are major contributors in the relevance of a given product in the market thus the organization carries the obligation of maintaining the maintaining the market relevance.

References

Bgateway (2014) Increase Your Profitability Retrieved from http://www.bgateway.com/grow improve/growing-a-business/increase-your-profitability/

Boyle, M (2014) Nestle Lean Cuisine Sales Drop as Shoppers Shun Freezer. Retrieved from

http://www.bloomberg.com/news/2014-03-12/nestle-lean-cuisine-sales-drop-as-shoppers shun-freezer.html

Houston, M. B.; Walker, B. A.; Hutt, M.D.; Reingen, P. H. (2001) Cross-Unit Competition for A Market Charter: The Enduring Influence of Structure. Journal of Marketing Vol 65 Issue 2

McCannon, B. C. (2009) Multi-Unit Pricing Managerial & Decision Economics Vol. 30 Issue 2

McGuigan, J. R.; Moyer, R. C.; Harris, F. H. (2014) Managerial Economics: Applications, Strategies, and Tactics (13th Edition) Cengage Learning: Mason, OH

Newman, A. A. (2013) Spots for Healthy Choice Try to Feel Dieters Pain. Retrieved from http://www.nytimes.com/2012/09/14/business/media/healthy-choice-ads-try-to-feel dieters-pain.html?_r=0

Wienclaw, R. A (2008) Pricing Policy Research Starters Business (Online Edition)