Operations Decision ECO550 Assignment 2 Lydia L. Brooks Running Head: OPERATIONS DECISION 2 OPERATIONS DECISION 3 February 16, 2014 Operations Decision Introduction There are countless low calorie microwavable food options in the market today that are available for purchase. As people experience a higher income, they can afford a better lifestyle than was previously accessible; therefore, people’s cooking style has changed. Instead of using traditional cooking methods, people now use microwaves to cook. With this microwave usage rise, a rise in microwavable food items has also occurred. With so many diverse products available it is so very easy to find and purchase a healthy choice of microwavable food. A low-calorie or healthy selection of diet choice is one that includes a good source of protein; in addition to containing a minimum of 3 grams of fiber (to satisfy), and also has no more than 600 milligrams of sodium (Zelman, n.d.). Some of the manufacturer options are: Lean Cuisine and Healthy Choice. Both of them are major competitors in the frozen food market. Lean Cuisine, a part of Stouffer’s (which dates back to the 1920’s) was acquired by Nestlé 1981 and has since then expanded its market in the US, Canada and Australia. Lean Cuisine offers a wide variety of frozen foods and is one of the top choices for low calorie food (Nestle', n.d.). Healthy Choice, manufactured by ConAgra, is another principal low calorie frozen food supplier. They are Lean Cuisine’s biggest competitor. The market segment is decided by three criteria which are the variables behavioralistic, psychographic and profile (Company history, n.d.) (Market segmentation, n.d.). Behavioralistic segmentation variables are those that are pursued from product and buying patterns such as volume of purchase, brand loyalty, readiness to buy and frequency (to name a few) and may be judged to be the primary basis. This variable has the advantage of using variables that are intimately related to the product itself; it is a somewhat direct beginning point for market segmentation (Market segmentation, n.d.) Psychographic segmentation variables are used when purchasing behavior compares with consumer lifestyle or personality. Consumers who hold diverse personality and lifestyle trends also become biased towards particular products. Their economic and social standing determine their choices (Market segmentation, n.d.). Profiling is not the most important gauge for market segmentation. Upon determining the differences in the markets, it also must be decided what channel through which these are exhibited. Profile variables like socio-economic group or physical locations are extremely essential in choosing the target audience (Market segmentation, n.d.). In deciding the market structure for the food industry, first one would have to keep in mind their target audience. It is vital to do a strong study of the economic growth of the entire food industry. Additionally, the.

1. Operations Decision
ECO550 Assignment 2
Lydia L. Brooks
Running Head: OPERATIONS DECISION 2
OPERATIONS DECISION 3
February 16, 2014
Operations Decision
Introduction
There are countless low calorie microwavable food options in
the market today that are available for purchase. As people
experience a higher income, they can afford a better lifestyle
than was previously accessible; therefore, people’s cooking
style has changed. Instead of using traditional cooking
methods, people now use microwaves to cook. With this
microwave usage rise, a rise in microwavable food items has
also occurred. With so many diverse products available it is so
very easy to find and purchase a healthy choice of
microwavable food. A low-calorie or healthy selection of diet
choice is one that includes a good source of protein; in addition
to containing a minimum of 3 grams of fiber (to satisfy), and
also has no more than 600 milligrams of sodium (Zelman, n.d.).
Some of the manufacturer options are: Lean Cuisine and
Healthy Choice. Both of them are major competitors in the
frozen food market. Lean Cuisine, a part of Stouffer’s (which
dates back to the 1920’s) was acquired by Nestlé 1981 and has
since then expanded its market in the US, Canada and Australia.
Lean Cuisine offers a wide variety of frozen foods and is one of
the top choices for low calorie food (Nestle', n.d.).
Healthy Choice, manufactured by ConAgra, is another principal
low calorie frozen food supplier. They are Lean Cuisine’s
biggest competitor. The market segment is decided by three
criteria which are the variables behavioralistic, psychographic
and profile (Company history, n.d.) (Market segmentation,
n.d.).

2. Behavioralistic segmentation variables are those that are
pursued from product and buying patterns such as volume of
purchase, brand loyalty, readiness to buy and frequency (to
name a few) and may be judged to be the primary basis. This
variable has the advantage of using variables that are intimately
related to the product itself; it is a somewhat direct beginning
point for market segmentation (Market segmentation, n.d.)
Psychographic segmentation variables are used when purchasing
behavior compares with consumer lifestyle or personality.
Consumers who hold diverse personality and lifestyle trends
also become biased towards particular products. Their
economic and social standing determine their choices (Market
segmentation, n.d.).
Profiling is not the most important gauge for market
segmentation. Upon determining the differences in the markets,
it also must be decided what channel through which these are
exhibited. Profile variables like socio-economic group or
physical locations are extremely essential in choosing the target
audience (Market segmentation, n.d.).
In deciding the market structure for the food industry, first one
would have to keep in mind their target audience. It is vital to
do a strong study of the economic growth of the entire food
industry. Additionally, there is a necessity to be a motive and
purpose for growth amongst the company itself (tech4t, n.d.).
To determine the scale of operation one has to know whether
the firm is going to supply the local, national or global market
(McGuigan, et al., 2014).
Economic study of the industry
The growth of the food industry in the United States is
also determined by the one percent population growth of the
nation. The food industry is also associated with the
population; therefore, an increase in population is sure to
impact sales in the food industry. When the scope of market for
frozen food is determined, it can also be related to the sale of
microwaves. Microwave sales are directly linked to the rise in
per capita income and also in the rise in the increase of the

3. working class people. Healthier food options are therefore also
related to the health-conscious customer.
Consumer Behavior
Consumer behavior is dependent upon the gender, age,
educational, social and economic background of the people.
When we have a look at the consumer behavior of the food
industry we should first study the target consumers. Our target
would be on the buying and purchasing power of the consumer.
Our sales would also be determined on the sale of microwave
ovens.
The more microwave oven users there are, the more the demand
for frozen foods will be. The consumer’s taste and educational
background also affects sales. Since consumer awareness is a
result of educational awareness about healthy eating habits, it is
necessary for consumers to realize the potential consumers and
work to provide them with the products they want.
Analyzing effectiveness of the market structure
The effectiveness of our market structure is dependent upon our
increase in demand and thereby the sales revenue generated
through them. The demand for the low-calorie microwavable
food is inelastic in nature; which implies that an increase in the
price of the food leads to the fall of the quantity demanded by
less than proportionate amount. The income elasticity of the
products is flexible and therefore we can say that it is a luxury
good. Thus advertisement policy also has an essential role to
play on the impact of the sales of the product (Nicholson,
2011).
Cross Elasticity
Cross Elasticity explains that if the demand for substitute goods
will constantly be positive, for the reason that the demand for
one good will increase if the price for the other good increases.
Like, if the price of fresh vegetables increases however all other
market conditions remain the same, the quantity demanded for
frozen, which is a substitute for fresh food will increase as
consumers switch to an alternative (www.investopedia.com).
Determining Change Factors

4. If the cost of microwaves is reduced, then more consumers will
demand frozen foods. Therefore, the cost of relative products
also plays an important role in the market structure of goods.
Additionally, there are some products which act as substitute;
the rise in price of a product, and other conditions remaining
constant also has an impact on the demand for substitute
products. For instance, we can use the example of fresh
vegetables, if the cost of fresh vegetables goes up, people will
automatically switch to ready-to-eat frozen food because it is
more cost effective to buy, in addition to being easy to cook
(AmosWEB, n.d.).
Long Run and Short Run Cost of Production Analysis
Cost of Production is the cost that an organization incurs on
manufacturing a product. Production costs include raw material
costs as well as the cost of labor. It includes long run as well as
the short term expenses incurred. Long run costs have no fixed
factors of production, while short run costs have fixed factors
and variables that impact production. Efficient long run costs
are persistent after the combination of outputs with the purpose
of a firm producing results in the preferred extent of the goods
at the lowest possible cost (McGuigan, 2014).
Long run production cost for low calorie microwavable food
includes the cost of machinery and land for setting up the
manufacturing unit. The short term cost of production includes
the variable costs and the costs that are only incurred for a short
period of time (McGuigan, 2014).
Short terms costs include the costs are based on a depiction of
the medium-term stably-acting macroeconomic variables that
affect food prices, as well as knowledge of their intensity and
the timing of their transmission. This analysis is formalized by
a partial single-equation model of food price inflation, and the
model approach is further supplemented and established by
means of other information and expert judgment. Short term
cost includes taxes and other expenses that are variable or
incurred once or short term. Any expense incurred towards
advertising the product is short term cost (Czech National Bank,

5. 2004) (McGuigan, 2014).
Business Discontinuation
A business which is unsuccessful and isn’t generating
enough revenue to carry out its business operations is very
likely to be discontinued. When there is less demand for
products than there is less revenue, the company suffers profit
losses. The following factors are reasons a business may be
discontinued (Mason, 2014):
1. There might not be enough capital to continue doing business
2. If there is no proper inventory management, then the business
can be discontinued. To maintain equilibrium between demand
and supply, inventory is necessary; however, if that equilibrium
is disturbed, this too might lead to a business shut down.
3. If the business expands outside the capacity of management
and operations, this can also lead to business discontinuation.
4. If an organization is not able to compete with the existing as
well as the new entrants in the market then it might be a cause
for its failure (Ames, 1983).
Hence we can say that low sales, competition, lack of
managerial ability and financial crisis might be the main
reasons for the business to shut down (Khan Academy, n.e.).
Pricing policy maximizes profits
An essential component for staying in the market is
pricing. Though there is no singular method of accuracy to
determine pricing strategy, there are some aspects such as the
cost of production, product demand, market position and
competition that help determine the prices (McGuigan J. M.,
2014).
In order to maximize profits these organizations should
focus on optimum pricing. An optimum price by definition is
the price at which the consumer is willing to purchase the
product. Competitive pricing is also done by keeping in view
the prices of similar organizations in the market (Basu, n.d.).
The demand for low-calorie microwavable food is inelastic
in nature; therefore, we can draw the conclusion that a price
increase in food prices leads to the decrease of quantity

6. demanded by less than proportionate amounts. Subsequently
this commodity is considered a luxury good so its advertising
elasticity also influences its sales. The organization should
follow the pricing recognized after analyzing the production
costs and competitors’ market prices.
Organizational goals regarding profit maximization are
also to be considered while determining the optimum plan for
pricing.
Financial Performance Evaluation
Evaluating the financial performance of a company means
having subjective measure of how well a firm makes use of its
assets from its primary mode of business as well as generates
revenues. This expression is also used as a general evaluation of
a firm's overall financial health over a given period of time, and
can be used to compare related firms across the same industry
or to compare industries or sectors in aggregation. While
evaluating financial performance for our companies we can take
help of the financial ratios as well (eHow, n.d.).
Barron states that the performance of a business enterprise is
influenced by its strategies and operations in market and non-
market environments (Baron, 2000).
Financial ratios are an important element in determining
the performance of an organization. Financial ratios should be
analyzed by a professional accountant. In order to keep a
record of the company’s financial health, ratio analysis is used
as a tool. Ratio analysis determines and interprets how
efficiently a company is working in terms of its finances. Ratio
analysis presents a simple and comprehensible understanding of
the accounting variables. It is an effective tool for
understanding a business’s success in terms of financial
undertaking and performance (Reference for Business
Encyclopedia of Business, n.d.).
Financial analysis is an accounting tool that can be used
internally as well as externally. Some reasons for internal ratio
analysis are to measure the worker’s performances, company
efficiency of operations in addition to credit policies are also

7. some reasons for internal ratio analysis; on the other hand,
credible external creditors, investors and borrowers perform
ratio analysis to ascertain and understand the company’s credit
worthiness, investment returns and their financial standing
(Reference for Business Encyclopedia of Business, n.d.).
Analysts carry out financial analysis using data provided
by the company itself such as the company’s financial
disclosures and their financial and economic data using external
sources as well.
Ratio analysis is illustrated by Myers as “Ratio analysis is
the study of relationships among various financial factors in
business” (Myers, 1962)
There are many kinds of ratios which are classified
according to their method of computation in addition to their
characteristics. Generally, ratios can be characterized as
quotients that reflect position of the company to face their
obligation. There are those that mirror the relationship between
net profits and expenditures, the ratios describing relation
between gross benefits and expenses and lastly the ones that
reflect the component of one variable to other. One could name
these ratios as coverage ratios, return ratios, turnovers ratios
and component percentages (Reference for Business
Encyclopedia of Business, n.d.)
Types of ratios follow below:
1. Activity ratios
2. Financial leverage ratio
3. Financial structure or solvency ratios
4. Liquidity ratios
5. Profitability ratios; and,
6. Shareholders ratios
Therefore, it can be concluded that through ratio analysis we
can evaluate the financial performance of the organization. It is
very important for financial data to be correct so that the
computation and analysis of data is accurate. The choice of
ratio depends on the kind of organization and the kind of
information we have.

8. “In conclusion, financial analysis can be an important tool
for small business owners and managers to measure their
progress toward reaching company goals, as well as toward
competing with larger companies within an industry. When
performed regularly over time, financial analysis can also help
small businesses recognize and adapt to trends affecting their
operations. It is also important for small business owners to
understand and use financial analysis because it provides one of
the main measures of a company's success from the perspective
of bankers, investors, and outside analysts” (Reference for
Business Encyclopedia of Business, n.d.).
References
Ames, M. D. (1983). Small Business Management. West
Publishing Co.
AmosWEB. (n.d.). Oligopoly. Retrieved from AmosWEB
Encyclonomic WEB pedia Web site:
http://www.amosweb.com/cgi-
bin/awb_nav.pl?s=wpd&c=dsp&k=oligopoly
Baron, D. P. (2000). Business and its environment 3rd Edition.
NJ: Prentice Hall.
Basu, C. (n.d.). Price elasticity & optimal pricing policy.
Retrieved from Houston Chronicle Web site:
http://smallbusiness.chron.com/price-elasticity-optimal-pricing-
policy-36020.html
BusinessDictionary.com. (2014). Elasticity of demand.
Retrieved from BusinessDictionary.com Web site:
http://www.businessdictionary.com/definition/elasticity-of-
demand.html#ixzz2qPBSYSAI
Company history. (n.d.). Retrieved from ConAgra Foods Web
site: http://www.conagrafoods.com/our-company/company-
history
Czech National Bank. (2004, January n.d.). Short-run food price
prediction methods. Retrieved from Czech National Bank Web
site:
http://www.cnb.cz/en/monetary_policy/inflation_reports/2004/2

9. 004_january/boxes_annexes/zpinflace_04_january_b.html
eHow. (n.d.). How to prepare relevant information for a
financial performance evaluation. Retrieved from eHow Web
site: http://www.ehow.com/how_6789532_prepare-information-
financial-performance-evaluation.html
Khan Academy. (n.e.). Oligopolies and monopolistic
competition. Retrieved from KhanAcademy Web site:
http://www.khanacademy.org/economics-finance-
domain/microeconomics/perfect-competition-
topic/monopolistic-competition-oligop/v/oligopolies-and-
monopolisitc-competition
Market segmentation. (n.d.). Retrieved from NetMBA Business
Knowledge Center Web site:
http://www.netmba.com/marketing/market/segmentation/
Mason, M. (2014). What causes small businesses to fail.
Retrieved from Moyak Web site:
http://www.moyak.com/papers/small-business-failure.html
McGuigan, J. M. (2014). Pricing techniques and analysis. In J.
M. McGuigan, Managerial economics: Applications, strategies
and tactics (p. 500:531). Mason: Cengage Learning.
McGuigan, J. R. (2014). Production economics. In J. R.
McGuigan, Managerial economics: Applications, strategies and
tactics (13 ed.) (p. 234:264). Mason: Cengage Learning.
McGuigan, J. M. (2014). Applications of cost theory. In J. M.
McGuigan, Managerial economics: Applications, strategies and
tactics (13th ed.) (p. 311:314). Mason: Cengage Learning.
Myers, J. (1962). Reporting of leases in financial statements
(accounting research study). American Institute of CPAs.
Nestle'. (n.d.). FAQs. Retrieved from Lean Cuisine Web site:
http://www.leancuisine.com/index/FAQ.aspx
Nicholson, W. &. (2011). Microeconomic theory: Basic
principles and extensions. (11th ed.). USA: Cengage Learning.
Reference for Business Encyclopedia of Business. (n.d.).
Financial analysis. Retrieved from Reference for Business
Encyclopedia of Business (2nd. ed.):
http://www.referenceforbusiness.com/small/Eq-Inc/Financial-

10. Analysis.html
tech4t. (n.d.). Customer profiling and segmentation. Retrieved
from Tech4t.co.uk Web site:
http://www.tech4t.co.uk/2013/05/customer-profiling-and-
segmentation/
www.investopedia.com. (n.d.). Cross Elasticity of Demand.
Zelman, K. (n.d.). Healthy frozen dinners: 20 Picks: How to
choose healthy frozen dinners. Retrieved from WebMD Web
site: http://www.webmd.com/diet/features/top-12-healthy-
frozen-dinners?page=3
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.
Use the following demand equation concerning the questions of
this assignment. This equation has been estimated through
linear regression. The independent variables are: price of the
product discussed in this assignment (P), advertising
expenditure (A), price of leading competitor’s product (C), per
capita income (I) in the area, and number of microwave ovens
sold in the area. The standard errors of estimation are in
parentheses below the equation.
QD = - 5200 – 42P + 20C + 5.2(I) + 0.20(A) + 0.25(M)
(2) (17.5) (6.2) (2.5) (0.09) (0.21)
R2 = 0.55 n = 26 F = 4.88
Your supervisor has asked you to compute the elasticities for
each independent variable. Assume the following values for the
independent variables:
QD = Quantity demanded
P (in cents) = Price of the product = 500
C (in cents) = Price of leading competitor’s product = 600
I (in dollars) = Monthly average income in the area = 5,500
A (in dollars) = Monthly advertising expenditures = 10,000

11. M = Number of microwave ovens sold in the area = 5,000
1. Compute the elasticities for each independent variable.
Note: Write down all of your calculations.
When P = 500, C = 600, I = 5500, A = 10000 and M = 5000,
using regression equation,
QD = -5200 - 42*500 + 20*600 + 5.2*5500 + 0.2*10000 +
0.25*5000 = 17650
Price elasticity = (P/Q)*(dQ/dP)
From regression equation, dQ/dP = -42.
So, price elasticity EP= (P/Q) * (-42) = (-42) * (500 / 17650) =
-1.19
Likewise,
EC = 20 * 600 / 17650 = 0.68
EI = 5.2 * 5500 / 17650 = 1.62
EA = 0.20 * 10000 / 17650 = 0.11
EM = 0.25 * 5000 / 17650 = 0.07
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 -1.19. This indicates a 1% increase in the
price of the product, which makes the quantity demanded to
drop by 1.19%. Therefore, the demand of this product is
somewhat elastic. Consequently, increase in price may drive
customers away.
Cross-price elasticity is 0.68. If the price of a competitor’s
product goes up by 1%, then quantity demanded of this product
will increase by 0.68%. This product is fairly inelastic to a
competitor’s price and there is no need to be concerned about
the competitor since their pricing won’t affect sales.
Income-elasticity is 1.62. This indicates that a 1% rise in the
average area income will boost the quantity demanded by
1.62%. In this aspect, the product is elastic and the company
can make the decision to raise the price if the average income

12. rises.
Advertisement elasticity is 0.11which means that a 1% increase
in advertising expenses will raise the quantity demanded by
only 0.11%. Therefore, demand is rather inelastic to
advertising. For that reason, more advertisement doesn’t
automatically mean that a company can raise the price because
that still could drive customers away.
With respect to microwave ovens in the area, elasticity is 0.07,
which shows an elevation of 1% in the number of ovens in the
area increasing the quantity demanded by a mere 0.07%.
Therefore, in this aspect, demand is inelastic and the pricing
strategy can simply skip this element.
Consequently, quantity demanded (as we have seen above) is
sensitive to the price of product and the income of people but
somewhat insensitive to our competitor’s price and almost
completely insensitive to advertising and the amount of
microwaves existing in area.
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 cut in price would raise the quantity demanded since the price
elasticity is negative. Additionally, the elasticity is a little over
unity. Revenue is maximized when the degree of elasticity is
one. With that in mind, a price reduction will raise the quantity
demanded and will lead to a net gain in sales as elasticity moves
towards unity. In my opinion, the firm should decrease the
price just as it would increase the market share and the revenue
generated.
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.
A. Plot the demand curve for the firm.
With all other factors constant, the demand equation is as
follows:
Q = -5200 - 42*P + 20*600 + 5.2*5500 + 0.2*10000 +

13. 0.25*5000
Q = 38650 - 42P
P = 38650/42 - Q/42 (plotted below)
B. 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
C. Determine the equilibrium price and quantity.
Solving the demand and supply equation concurrently,
38650 - 42P = 5200 + 45P
87P = 33450
P = 384.48
and Q = 5200 + 45*384.48 = 22501
Therefore, the equilibrium price is 384 cents and the
equilibrium quantity is 22,501 units. Additionally, the
equilibrium price and the quantity can be seen on the graph
indicated at the point where the supply and demand curve meet.
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 is pointed out in the demand equation, demand of the low-
calorie food can change if there is a change in consumer
income, the pricing of a competitor product and the price of
correlating goods (microwave oven). This change can also
happen as a result of change in consumer preference (e.g.
consciousness towards low-calorie food). Supply of the product
can change if there is a change in the number of product
suppliers, production technological advances in addition to
other elements like labor and raw-material availability change,
which directly affect production costs.
5. Indicate the crucial factors that could cause rightward

14. shifts and leftward shifts of the demand and supply curves.
An increase in consumer income, a price cut in the price of a
complementary product (e.g., microwave ovens) could cause a
rightward shift of demand curve product; as could a population
increase or increased preference for the product (e.g., awareness
towards low-calorie food). A decrease in consumer income or a
recession (like the U.S. has been experiencing) can cause a
leftward shift of demand curve; additionally, an increase in
price of a complementary product (microwave oven etc.) could
cause the same leftward shift of demand curve.
Technology advances in food processing, increased
availability of cheap labor and raw materials, increased tax-cuts
and government subsidies (among other things) can cause a
rightward shift of supply curve. A leftward shift can be caused
by a decrease in availability or an increase in price of labor and
raw materials, increased taxes, etc.
Demand 34450.0 30250.0 26050.0 21850.0 17650.0
13450.0 100.0 200.0 300.0 400.0 500.0
600.0 Supply 34450.0 30250.0 26050.0
21850.0 17650.0 13450.0 650.0
556.6666666666666 463.3333333333334 370.0
276.6666666666668 183.3333333333334
Q
P