Running head: OPERATIONS DECISION 1 OPERATIONS DECISION 9 Operations Decision Professor Kornilov Managerial Economics and Globalization February 14, 2014 There are many options of foods with low-calorie in the market. With the rise in income people can now use microwaves to cook instead of traditional cooking methods. The rise of microwaves has led to rise in food items. Having a variety of products available one can target on healthy choices of microwavable foods. For a type of food to be considered health it should contain sources of proteins, 600 milligrams of sodium and 3 grams of fiber for satiety purposes. Manufacturers of these options include Lean Cuisine and Healthy Choice. Both of these companies are competitors in frozen food markets. Lean Cuisine started in the year 1981 under the ownership of Nestle and has expanded its markets in Canada, US, and Australia and it offers variety of frozen foods and a leading choice for low-calorie s. Healthy Choice is another choice for low-calorie foods the product produced by ConAgra. Healthy Choice are the biggest opponents of Lean Cuisine (Schlosser). These two companies have two strategies for pricing which are penetration pricing and skimming pricing. A penetration pricing is involved with low initial prices to encourage a large number of customers to try the product. The companies’ hopes are to sell large volumes in order to generate high revenues. New varieties of food stuffs are often introduced at low opening prices. A company does not utilize a high strategy for such products. This initial low price of the product is often combined with samples, advertising, coupons and other special incentives in order to increase awareness of the product and customers to try it. Companies start to make profits when more units start to be sold. The company can also experience profits when there is expansion of product distribution that lead to increase in profits. The pricing strategy which involves setting high initial prices for food products to get back the investment spend on the product is called skimming pricing strategy. This market involves customers who are not price sensitive or those that adapted with the product long time ago. For a company to gain enormous profits, then its product must have been accepted in the market place. The profitability stage of a company is characterized by higher profits which attracts more competitors who enter the market very quickly. A company must ensure the availability of its product whenever a customer needs it otherwise it will lose the customer to its competitors. The best plan to assess the effectiveness of the company’s performance include laying down the companies goals which are to make the maximum profits while incurring the low costs, also ensuring that the frozen food prod.

1. Running head: OPERATIONS DECISION
1
OPERATIONS DECISION
9
Operations Decision
Professor Kornilov
Managerial Economics and Globalization
February 14, 2014
There are many options of foods with low-calorie in the market.
With the rise in income people can now use microwaves to cook
instead of traditional cooking methods. The rise of microwaves
has led to rise in food items. Having a variety of products
available one can target on healthy choices of microwavable
foods. For a type of food to be considered health it should
contain sources of proteins, 600 milligrams of sodium and 3
grams of fiber for satiety purposes. Manufacturers of these
options include Lean Cuisine and Healthy Choice. Both of these
companies are competitors in frozen food markets. Lean Cuisine
started in the year 1981 under the ownership of Nestle and has
expanded its markets in Canada, US, and Australia and it offers
variety of frozen foods and a leading choice for low-calorie s.
Healthy Choice is another choice for low-calorie foods the
product produced by ConAgra. Healthy Choice are the biggest
opponents of Lean Cuisine (Schlosser).
These two companies have two strategies for pricing which are

2. penetration pricing and skimming pricing. A penetration pricing
is involved with low initial prices to encourage a large number
of customers to try the product. The companies’ hopes are to
sell large volumes in order to generate high revenues. New
varieties of food stuffs are often introduced at low opening
prices. A company does not utilize a high strategy for such
products. This initial low price of the product is often combined
with samples, advertising, coupons and other special incentives
in order to increase awareness of the product and customers to
try it. Companies start to make profits when more units start to
be sold. The company can also experience profits when there is
expansion of product distribution that lead to increase in
profits.
The pricing strategy which involves setting high initial prices
for food products to get back the investment spend on the
product is called skimming pricing strategy. This market
involves customers who are not price sensitive or those that
adapted with the product long time ago.
For a company to gain enormous profits, then its product must
have been accepted in the market place. The profitability stage
of a company is characterized by higher profits which attracts
more competitors who enter the market very quickly. A
company must ensure the availability of its product whenever a
customer needs it otherwise it will lose the customer to its
competitors. The best plan to assess the effectiveness of the
company’s performance include laying down the companies
goals which are to make the maximum profits while incurring
the low costs, also ensuring that the frozen food products are
available to consumer whenever the consumer needs them. Also
for an effective business, a company should determine the
company’s challenges and opportunities so as to make the best
profits. The companies also should clearly identify their target
market and ensure that their products reach the intended
consumers and also be prepared for the competitions that they
may face in the market. Effective companies and marketing
plans are very detailed, anticipating and satisfying the

3. consumer’s needs.
For a company’s market structure to change there must have
occurred an outlawed activity like the tying of consumers where
a customer is required to buy goods they do not want in order to
acquire the goods they want. This leads to a company losing
customers therefore the strategy of many buyers and many
sellers becomes unbalanced therefore a business opting to
change their market structure. A company can also change its
market structure when there occurs interlocking directorates.
This is where we have same individuals serving on board of
directors of competing companies. This leads to the two
companies producing similar products and therefore changing
the market structure of a company. There may be a change of
market structure when we have price discrimination where some
customers are served with different prices with other customers.
This majorly leads to dissatisfaction of customers and therefore
customer opting for either substitutes or going for the products
from another company. The effect of the company changing
their market structure if so defined and it may lead to a
company losing a very portion of their profits and therefore
incurring big loses. Also it is clear that a change in market
structure can lead to a company losing many of its consumers
due to dissatisfaction.
The reaction of the firm’s negative economic profit will depend
on the time horizon. The firm does not have an option of
departing the production industry. In the short run the company
is stuck with its costs and its factors of production. The
company has two options either to stay or close down. If the
company decides to stay open it will make the profit even if it
is a negative profit. If the company shuts down it will lose an
amount equal to its fixed costs because shutting down both
revenue both their revenue and their variable costs disappear
but fixed costs remain. The company’s short run decision to
produce or not decision is based on where it loses a lot of
money. If the negative economic profits of the quantity are less
than the negative economic profits of losing fixed costs the firm

4. will remain open.
In the long run perfectly competitive companies will not
produce at negative economic profit if they can make more
money elsewhere and if it is easy to get out of the market.
Therefore these companies make zero economic profits in the
long run. When other things are not equal, the firm will move
from one average total cost to another as it expands its capacity.
Eventually, it will reach average total cost curves that exist at
the most efficient scale and then the firm will be pushed to the
breakeven point on the average total cost curve.
A company should discontinue its operation when its sales have
decreased to a level where the company cannot get back. The
decline in sales may be due to consumer preferences where
consumers have preferred low-calorie microwavable food from
other companies and this makes the company go into a loss of
producing large numbers of products which are no consumed.
Technological advances also may lead to decrease in the sales
of the company if the company does no utilize it in the
advertisement of it products. Proper advertisement of the
company’s products ensures the products reach a wide variety
of consumers. Also alternative available in the market that
satisfy the same needs as the company’s product may lead to the
company’s making low profits which may lead to closure of the
company. The company may also shut down when the operation
cost exceeds the returns from the sale of foods from the
company.
The management should ensure proper management of the
company and also involve more in advertising as this helps in
capturing more customers and making them aware of the
products. The company should prepare for a tuff completion
from other companies producing the same products in the
market. The rationale for this is to ensure that the company
remains running and serving its customers satisfactorily.
There are two pricing policies that can be used but the most
effective pricing policies is the penetration pricing strategy.
This strategy involves using the initial price of the product to

5. encourage the customers to try the product. The aim of the
company is to sell large amount of low-calorie microwaveable
food (Rodale, 2008). New products are introduced at initial
prices. These low prices are always accompanied with
advertising, coupons, samples and other special incentives this
helps to increase awareness of the product and get the
consumers ready to try it and use it. Because of its low initial
costs on the product penetration pricing strategy encourages
customers to switch to the new product. This means an increase
in number of customers for the company and therefore increased
returns for the company. The penetration pricing strategy is the
most commonly associate with the marketing objectives of
increasing market share or the sale volumes. Its lower price on
the products when entering the market is a competitive weapon
against other companies that produce the same products of low-
calorie microwavable foods. Penetration strategy catches the
completion off-guard and therefore the competitors do not have
time to prepare. It also encourages word of mouth
recommendation for the product because of the attractive
pricing and makes the company to focus on minimizing unit
costs as the business starts. The low prices act as a barrier for
other potential competitors to enter into a similar strategy and
the sales volumes should be high because distribution may be
easier to obtain.
The financial performance of the company is the measure of
how long a company will stay on production. For a company to
be able to meet the short-term financial obligations is a very
important part to use to maintain operation of the company and
for future growth. A large factor determining the short term
financial performance of a company is liquidity which is the
degree to which a market is willing to buy a particular product.
The money market account as a type of asset can be converted
into cash within a day or two if not instantly. A building where
the company sits is very liquid because it can take a long time
before it is sold and make cash out of it. According to the low-
calorie microwave company the profits of the sales from freeze

6. foods and the liquidity of the buildings of the company portray
the company’s financial performance. The long term financial
performance of low-calorie microwave Food Company is
generating enough income to sustain the company for a long
period of time. When the company is making a long term
financial performance it looks for opportunities of making
maximum profits. The company does not produce negative
economic profits. The evaluation of financial performance
requires managerial decisions where a manager should decide
on the best decision to take in order to maximize the profits.
For a company to improve its profitability and deliver more
value to its stakeholders, it should have a customer focused
growth strategies where areas that generate the largest
proportion of revenue and profits are identified. Customer-
focused strategy is based on the company’s existing customers.
Another customer-focused strategy is to enter business that have
a strong strategic links to the core. Another strategy that a
company should take to gain more profits is to focus in
executing growth strategies this will include how organized the
management is to deliver a high level of value to customers.
Also have a management that is performing this will ensure they
work hard in making the companies grow. This is the plan to
implement the above recommendations:
1. The company should work towards minimizing costs. This is
done through identifying the steps you could take to minimize
on expenditure for example negotiation on you supplier’s
prices.
2. The company should be focused on reaching its customers
and on attaining maximum profits.
3. Make sure the company is in continuous improvements and
the profits should have steady improvements.
In conclusion managers should lay down good plans to assess
the best market structure that will lead to development of the
company. A change of market structure can enormously affect
the company’s performance and there the management of the
company should be very cautious on the market structure. There

7. occur some circumstances when a company may be forced to
shut down. These situations may be either be long term or short
term. A success of a company depends also on the pricing
policy. Good pricing policy leads to the success of a company
through making of maximum profits.
References
Doukidis, G. I. (2004). Social and economic transformation in
the digital era. Hershey, PA [u.a.: Idea Group Publ.
Harder, F. (2003). Fashion for profit: A professional's complete
guide to designing, manufacturing, & marketing a successful
line. S.l.: Frances Harder.
Mann, M., & Amazon.com (Firm). (2010). Make millions and
make change!: Secrets to business and personal success. S.l:
MakeMillions.com.
Gitman, L. J., & McDaniel, C. D. (2009). The future of

8. business: The essentials. Mason, OH: South-Western Cenage
Learning.
Schlosser, E. (2012). Fast food nation: The dark side of the all-
American meal. Boston: Mariner Books/Houghton Mifflin
Harcourt.
Use the Internet to research an annual report of a manufacturing
company of your choice
From the company chosen from the above internet research, put
yourself in the role of an investor or creditor; suggest ratios that
you believe would provide you with the most important
information needed to make accurate predictions about the
company’s financial condition. Please provide a rationale for
your response.
Using the manufacturing company from the above search,
identify at least three (3) ratios that could be manipulated to
mislead investors and creditors regarding the company’s
financial condition. Examine the motivation of management to
manipulate the ratios identified.
Assignment 1: Demand Estimation
Dr. Guerman V. Kornilov
Managerial Economics and Globalization
January 26, 2014

9. Imagine that you work for the maker of a leading brand of low-
calorie microwavable food that estimates the following demand
equation for its product using data from 26 supermarkets around
the country for the month of April.
QD = 20,000 - 10P + 1500A + 5PX + 10 I
(5,234) (2.29) (525) (1.75) (1.5)
R2 = 0.85 n = 120 F = 35.25
Your supervisor has asked you to compute the elasticities for
each independent variable, (P, A, PX, and I), in the equation.
Assume the following values for the independent variables:
Q D = Quantity demanded
P (in cents) per case = Price of the product = 8000
PX (in cents) = Price of leading competitor’s product = 9000
I (in dollars) = Per capita income of the standard metropolitan
statistical area (SMSA) where the supermarkets are located =
5000
A (in dollars) = Monthly advertising expenditures = 64
1. Compute the elasticity for each independent variable. Note:
Write down all of your calculations.
When P = 8000, A = 64,PX = 9000, I = 5000, using regression
equation,
QD= 20000 - 10*8000 + 1500*64 + 5*9000 + 10*5000 =
131,000
Price elasticity = (P/Q)*(dQ/dP)

10. From regression equation, dQ/dP = -10.
So, price elasticity EP= (P/Q) * (-10) = (-10) * (8000 / 131000)
= -0.61
Similarly,
EA = 1500 * 64 / 131000 = 0.73
EPX = 5 * 9000 / 131000 = 0.34
EI = 10* 5000 / 131000 = 0.38
2.Determine the implications for each of the computed
elasticities for the business in terms of short-term and long-term
pricing strategies. Provide a rationale in which you cite your
results.
Price elasticity is -0.61 which means a 1% increase in price of
the product causes quantity demanded to drop by 0.61%. So, the
demand of the product is relatively inelastic. Therefore,
increase in price may not have large impact on the customers.
Advertisement elasticity is 0.73, meaning 1% increase in
advertising expenses increases quantity demanded by only
0.73%. So, demand is relatively inelastic to advertising.
Therefore, more advertisement won’t necessarily mean that firm
can raise the price because it still could drive customers away.
Cross-price elasticity is 0.34 which means if price of competitor
product increases by 1%, then quantity demanded of this
product increases by 0.34%. So, product is relatively inelastic
to competitor’s price and the firm shouldn’t worry about the
competitor as their pricing won’t have any major effect on its
own sales.
Income-elasticity is 0.38 which means 1% rise in average
income in the area boosts quantity demanded by 0.38%. So,
product is relatively inelastic in this aspect and so the firm
shouldn’t worry about consumer income considerations in
pricing strategy. Quantity demanded won’t suffer largely from
this aspect even if income increases / decreases.
Therefore, quantity demanded is relatively inelastic to all
factors considered. So, company shouldn’t worry much about
these factors.

11. 3.Recommend whether you believe that this firm should or
should not cut its price to increase its market share. Provide
support for your recommendation.
A price slash would increase quantity demanded, as the price
elasticity is negative. But, magnitude of elasticity is a less than
unity. Revenue is maximized when the magnitude of elasticity is
one. Therefore, a price-cut will increase quantity demanded but
will lead to a loss of sales. So, price-cut should be made only if
firm is trying to strengthen its consumer base; from profit
perspective, it should instead raise the price.
4.Assume that all the factors affecting demand in this model
remain the same, but that the price has changed. Further assume
that the price changes are 100, 200, 300, 400, 500, 600 cents.
1.Plot the demand curve for the firm.
Keeping other factors constant, demand equation is
Q = 20000 - 10*8000 + 1500*64 + 5*9000 + 10*5000
Q = 211000 - 10P
P = 21100 - 0.1Q (plotted below)
2.Plot the corresponding supply curve on the same graph using
the supply function Q = 5200 + 45P with the same prices.
Q = 5200 + 45P
P = -5200/45 + Q/45
3.Determine the equilibrium price and quantity.
Solving demand and supply equation simultaneously,
211000 - 10P= 5200 + 45P
55P = 211000 - 5200
P = 3741.82
and Q = 5200 + 45*3741.82 = 173,581
So, equilibrium price is 3742 cents and equilibrium quantity is
173,581 units. The equilibrium price and quantity can also be
found from the graph to be the point where supply and demand

12. curve intersect.
4.Outline the significant factors that could cause changes in
supply and demand for the product. Determine the primary
manner in which both the short-term and the long-term changes
in market conditions could impact the demand for, and the
supply, of the product.
As the demand equation points out, demand of the low-calorie
food can change due to a change in consumer income, price of
competitor product and price of related goods (microwave
oven). The change can also come as a result of change in
consumer preference (like awareness towards low-calorie food).
Supply of the product can change due to change in number of
suppliers of the product, technological advances in the
production and other factors like change in availability of labor
and raw-material which directly affect production costs.
5.Indicate the crucial factors that could cause rightward shifts
and leftward shifts of the demand and supply curves.
A rightward shift of demand curve could be caused by an
increase in consumer income, a decrease in price of
complementary product like microwave ovens, an increase in
population or increased preference for the product like
awareness towards low-calorie food. A leftward shift of demand
curve can be caused by a drop in consumer income or recession,
increase in price of complementary product like microwave
oven etc.
A rightward shift of supply curve can be caused by
technology advances in food processing, increased availability
of cheap labor and raw material, increased tax-cuts and
government subsidies etc. A leftward shift can be caused due to
a decrease in availability / increase in price of labor and raw
materials, increased taxes etc.
Demand 210000 205000 200000 195000 190000

13. 173581.8 168581.8 163581.79999999999
158581.79999999999 153581.79999999999
148581.79999999999 100 600 1100 1600 2100
3741.82 4241.8200000000024 4741.8200000000024
5241.8200000000024 5741.8200000000024
6241.8200000000024 Supply 210000 205000
200000 195000 190000 173581.8 168581.8
163581.79999999999 158581.79999999999
153581.79999999999 148581.79999999999
4551.1111111111159 4440 4328.8888888888887
4217.7777777777765 4106.6666666666788
3741.8177777777801 3630.7066666666628
3519.5955555555574 3408.4844444444443
3297.3733333333394 3186.2622222222217
Q
P