Operation decisions

Operation decisions

  1. From the previous years, there has been a tremendous increase in the number of microwavable food products introduced into the market. From the current society where many people are working and enjoying an increase in household’s income, there are conveniences with this type of meal which requires only a little time to prepare right at the comfort of our homes. Many families have considered this type of food as an option for both supper and lunch meals. However, younger parents are shifting of from these microwavable products towards the frozen food alternatives since they believe that these type of foods have a higher nutritional value and with fewer calorie contents.

Today the major competing firms in the market for low-calorie microwavable food products are Lean Cuisine and Healthy Choice. Healthy Choice got its establishment back in 1989 and had gone all the way to becoming one of the biggest in the industry. Likewise, Lean Cuisine a Nestle firm got its establishment back in 1981 and had reached markets ranging from Canada, Austria and the United States. The market in which this industry thrives is divided into three categories i.e. psychographic, behavioural and profile. Irrespective that profile is no important category for this market segment, it is an important factor which can be used to determine the path in different market segmentation. Their variable such as geographical locations and level of consumer income helps to differentiate the target group of consumers. On the other hand, behaviour factor is based on the actual behaviours of consumers towards a particular product. This includes factors such as consumer loyalty, consumers’ willingness to buy and the rate of use. Market segmentation based on psychographic is based on consumer’s lifestyles such as interests and their daily activities (Market Segmentation, 2017).

From the previous assignment regression analysis was conducted to evaluate the demand function of a microwavable food product.

The equation was: QD=-2000-100P+15A+25PX+10I

(5.234)  (2.29)   (525)   (1.75)    (1.5)

R2=0.85 n=120 F=35.25

R2 value is high, and this indicates that the independent variable used in the equation causes variation in demand.

  1. From the change in microwavable frozen food industry market structure, probably factors which might cause the change may include market concentration which leads to a few numbers of firms in the industry Roger, LeRoy & Miller, 2013). This means that the market can achieve price control of the product since the monopoly market that exists turns into an oligopoly market which is characterized by few companies which monitor behaviour from their competitors via production or introduction of new products in the market.

Suppose that all the producers in the monopoly market change their market prices and start to compete, it would mean that they would see a reduction in profits which is a similar scenario with an oligopoly market which produces a similar product. Though monopolistic firms need to come up with new products for them to remain relevant in the market, market demand can, however, change due to changes in consumer income, tastes and preferences, competitor’s price or changes in technology. Hence it is important for the firm to understand their competitors and the kind of market which they will maximize their profits.

  1. 3. In the short run, the price under monopoly competition is greater than the marginal costs hence firms can generate profits. The introduction of new firms in the industry as well as upward shifts in the supply results to a decrease in the equilibrium prices which is reflected by downward shifts in the demand curve. The perfect market is characterized by free entry and exit, and therefore the introduction of a new firm causes price fluctuations and demand of existing firms since the firms have no influence on market prices (Scholsticus, 2011). In the long run, marginal revenues equal marginal costs with prices equal to zero and hence buyers are tempted to look for alternatives.

For a firm to remain profitable, market prices need to be greater than its average total price which is achieved only when the firms meet its average total costs as well as its short run average cost for it to remain relevant in the long term.

TC = 160,000,000 + 100Q + 0.0063212Q2

VC = 100Q + 0.0063212Q2

MC= 100 + 0.0126424Q

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

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

160,000,000=0.0063212Q2

Q=159096

ATC=160,000,000/159096 + 100 + 0.0063212(159096)

=2111 UNITS

VC=100 + 0.0063212(159096) =1006

  1. Circumstances under which the firm may discontinue its operation include factors such as high production costs, markets prices or inability to compete with other competitor’s prices or innovation of new products. A firm can also discontinue its operation if there’s insufficient funding or failure to access raw materials. For a company to remain competitive in the market, there’s need to ensure that they understand the market on which they operate in as well as her competitors. It’s important for them to remain relevant and remain profitable in the business. They should also ensure that they have different suppliers to source their raw material just in case one exits the market their other options to look up to. It’s important for the business to ensure that there’s adequate capital which will cater all of its production costs and other operations.
  2. Irrespective of which market structure, profit maximizing level of output is obtained at a point where marginal revenue equals marginal costs. One important feature of a perfect competitive market is that there are free entry and exit of firms in the industry. This leads to a significant number of firms which are small in size and producing similar products. Under perfect competition, not a single firm can determine prices in the market hence all the industry players are price takers. On the other hand, monopoly market is characterized by physical product differentiation as well as time and location. With this, competing firms has power in the market and hence has a variety of options related to pricing.

A pricing strategy that would enable the firm in maximizing the profits is through the adoption of a marginal costing strategy. This is because the good’s price will be set in a way that it equals extra cost incurred in the production of additional units of output. Via this policy, there is a charge for each unit produced and sold. However, firms will set their prices close to their marginal costs only when there experience low sales (Cohen, 2004). For a firm to remain profitable, her market prices should be higher than its total costs in its highest production level i.e. a price that covers average total cost both in the short and long run flow of the organization.

Suppose P=20000-0.1Q

TR=PQ=20000Q-0.1Q2

MR=dTR/dQ= 20000-0.2Q

At profit maximizing MR=MC  20000-0.2Q=100 + 0.0126424Q

19900=0.2126424Q     Q=93584

P=20000-0.1(93584)=10641

The industry demand is inelastic since an increased price results to a decreased amount of quantity demanded.

  1. Financial management is an important aspect of every business venture which should be kept in check to ensure smooth flow of activities of the business. Frozen microwavable food industry can measure its financial performance via keeping track of its consumers which will necessitate it know the sales returns. Sales pattern can be analyzed concerning season and regional variances. For instance, the firm can analyze its performance comparing it with past years for it to know whether it’s performing as per the industry standard. Critical analysis of financial performance will enable the firm to understand the flow in case of a decline in performance. Through these methods, the company will be able to calculate revenue generated concerning the number of sales in a given period. The company can now use the revenue generated to measure its net income hence the financial performance of the firm can now be used to ensure that the firms maintain confidence with her investors which keeps the company performances at a high.

     When a firm is operating in a monopoly market, it enjoys huge profits which might trigger other companies to enter the market (McGuigan, 2014). For it to continue being in that position, there’s need to ensure maximum investment in product advertisements, however, this is just a short term solution since there may be other firms with innovations entering the industry which consumers switch to. The monopolistic market is only efficient in the short run.

TR= 20000Q-0.1Q2     TC=160,000,000 + 100Q + 0.0063212Q2

Producer surplus=TR-TVC VC=100Q + 0.0063212Q2

Q=15819    profit=10641*15819-160000000=8329979

  1. For it to remain profitable, a company needs to improve on the level of quality of its products. This ensures that the companies maintain her customers as well as getting more and increase their base. Production of good quality goods boosts the company to increase sales hence an increase in net revenue. Production of   I recommends them to innovate on their products to stay ahead of their competitors. For instance, they need to adopt new production techniques which necessitate them to produce quality products which will help them maintain their customers as well as attract new buyers.

Another recommendation for the firm is increasing their marketing base. This will enable them to keep their products in the consumer’s mind. For instance, a firm can invest on the advertisement of its brands showcasing the difference between their competitors’ products, and if the company can invest in advertisements even in its tough economic times, it creates a perception in the consumer’s mind that it does not cut on her expenses. The company can also capture the consumer’s mind through investing on corporate social responsibility projects which will allow consumer participation. This will earn respect to the company, and as a result, the consumer will buy more.

 References

Cohen, H. (2004). Pricing Policy: Sven Factors to consider. Retrieved, from www.healthychoice.com

Market Segmentation. (2017). . Retrieved, from www.netmba.com

McGuigan, J., Moyer, R. C., & Harris, F. (2014). Managerial Economics. : Cengage Learning.

Roger LeRoy Miller. (2013). Economics Today. Pearson

Scholasticous, K. (2011). Monopolistic Competition Example. Retrieved, from www.buzzle.com

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