Recommended
Recommended
More Related Content
Similar to Assignment 3 Long-Term Investment Decisions Due Week 9 and wort.docx
Similar to Assignment 3 Long-Term Investment Decisions Due Week 9 and wort.docx (20)
More from sherni1
More from sherni1 (20)
Recently uploaded
Recently uploaded (20)
Assignment 3 Long-Term Investment Decisions Due Week 9 and wort.docx
- 1. Assignment 3: Long-Term Investment Decisions Due Week 9 and worth 300 points Assume that the low-calorie microwavable food company from Assignments 1 and 2 wants to expand and has to make some long-term capital budgeting decisions. Use the Internet to research government policies and regulation. Write a six to eight (6-8) page paper in which you: 1. Outline a plan that managers in the low-calorie microwaveable food company could follow when selecting pricing strategies for making their products as inelastic as possible. Provide a rationale for your response. 2. Examine the major effects that government policies have on production and employment. Predict the potential effects that government policies could have on your company. 3. Determine whether or not government regulation to ensure fairness in the low-calorie microwavable food industry is needed. Cite the major reasons for government involvement in a market economy. Provide two (2) examples of government involvement in a similar market economy to support your response. 4. Examine the major complexities that would arise under expansion via capital projects. Propose key actions that the company could take in order to prevent or address these complexities. 5. Suggest the substantive manner in which the company could create a convergence between the interests of stockholders and managers. Indicate the most likely impact to profitability of such a convergence. Provide two (2) examples of instances that support your response. 6. Use at least five (5) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic
- 2. 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. The specific course learning outcomes associated with this assignment are: • Propose how differences in demand and elasticity lead managers to develop various pricing strategies. • Analyze the economic impact of contracting, governance and organizational form within organizations. • Use technology and information resources to research issues in managerial economics and globalization. • Write clearly and concisely about managerial economics and globalization using proper writing mechanics 2 Running Head: Operations Decisions Assignment 2: Operations Decisions Toni Washington Professor J. Elu Econ 550
- 3. February 23, 2014 The Market Structure of the Low calorie Food Company From the regression results in the previous assignment, it clearly shows that the product inelastic. Considering the elasticities of the 26 companies, it clearly shows that the market structure is a monopolistic competition market. This implies that each company controls a small proportion of the market share. They have almost similar product, only slightly differentiated. The Leading Competitors in the Low-calorie Microwavable food Industry There are many low calorie microwavable food options available in the market today. With the rise in income people can afford a cheaper lifestyle; therefore there has been a change in the cooking style of people. People now use microwaves in place of traditional cooking methods. With rise in microwaves, the rise in food items also occurred. With so many varieties of products available, one can easily target upon a healthy choice of microwavable food. A low calorie food or a healthy option of food is one which comprises of a good source of protein along with having at least 3 grams of fiber (for satiety), in addition to not more than 600 milligrams of sodium (Zelman, (n.d.)). Some of the options are manufactured by Lean Cuisine and Healthy Choice. Both of them are the competitors in the market
- 4. of frozen foods. Lean Cuisine was started in 1981 and has since then grown its market in US, Canada and Australia. The company is owned by Nestle and offers variety of frozen foods and is a leading choice for low calorie food. Healthy Choice, the product manufactured by ConAgra is another leading low calorie frozen food supplier. They are the biggest opponents to Lean Cuisine. The market segment is decided by three criteria’s which are Behavioral, Psychographic and Profile variables. Behavioral variables are those that are sought from the product, and buying patterns like frequency and volume of purchase may be considered the fundamental basis. Psychographic variables are used when purchasing behavior correlates with the personality or lifestyle of consumers. Consumers who hold varied personalities and lifestyle trends also become prejudiced towards certain products. Their choices are determined by their economic and social standing. Profiling is not a very important criterion for market segmentation. After deciding upon the differences the markets also needs to decide upon the channel through which these are exhibited. Profile variables such as socio-economic group or geographic locations are very necessary in deciding the target audience. In determining the market structure for food industry, one would firstly keep in mind the target audience. A clear study of the economic growth of the whole food industry is very important. There also need to be a motive and objective for growth amongst the company itself. The scale of operation needs to be decided upon i.e., whether the company is going to for local market, national or global market. The growth of the food industry in US also determined upon the 1 % population growth of the nation. Food industry is also associated to the population therefore an increase in population is bound to have an impact on sales in the food industry. When we determine the scope of market for frozen food we can also relate it to the sale of microwaves. Microwave sales are directly
- 5. linked to the rise in per capita income and the rise in increase of working class people. Healthier food options are therefore also related to the conscious customer. 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. More the number of microwave oven users more will be the demand for frozen foods. The taste and educational background of the consumers would also affect the sales. Since the aware consumers would be a result of the educational awareness about healthy eating habits, it is necessary that we realize our potential consumers and work for providing them with the product that they want. Analyzing effectiveness of the market structure The effectiveness of our market structure would be dependent upon the increase in demand and thereby the sales revenue generated through them. The demand for the low-calorie microwavable food is inelastic in nature. This 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, 2012) Cross Elasticity explains that if the demand for substitute goods will constantly be positive, then the demand for one good will increase if the price for the other good increases. Like for instance, if the price of fresh vegetables increases while 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. Determining factors of change
- 6. If cost of microwaves is reduced, then there will be more consumers who would be demanding frozen foods. Therefore the cost of relative products also plays an important role in the market structure of goods. Substitute’s products can also bring about the change in market structure. This may be brought about by an introduction of new firm to the market. The effect of this is that companies will try to lower their prices and improve quality of products and services in order to maintain their competitive advantage. Long Run and Short run Cost of Production analysis Cost of Production is the cost that an organization incurs in manufacturing a product or delivering a service. 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. 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. 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 (CNB, 2004). 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. Circumstances under the Company should discontinue
- 7. Operations A business which is not successful and doesn’t generate enough revenue to carry out its business operations is very likely to be discontinued. When the demand for products lowers, the revenue is also likely to fall, leading to losses. Circumstances that can call for a discontinuation of a company include inadequate capital to continue a business enterprise. A company may lack funds to carry out its operations, thus shutting it down will help minimize more losses and debts. If there is no proper inventory management, it is ideal for a company to be discontinued. Inventory is necessary to maintain equilibrium in between demand and supply. If this equilibrium is disturbed this might lead to business shut down. A growth of a business beyond the capacity of the management can also lead to shutting down of a company. Management is expected to guide and run the company smoothly. If it happens that the management is incompetent to handle the high demands of the company, running the company will be risk as it may not be able to meet the demands of the consumers and all employees. If an organization, for one reason or the other, 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 are the basis for shutting down a company. Pricing policy to maximize profits Pricing is a very essential component of staying in a market. Despite the fact that there is no one single accurate method to find out your pricing strategy, fortunately there are some factors like the cost of production, demand of the product, market position and the competition through which we can determine the prices. In order to maximize the profits the organization should work on the optimum pricing. An optimum price is the price at which the consumer is willing to purchase the product. Competitive pricing is also done by keeping in view the prices
- 8. of similar organizations in the market. Since the demand for the low-calorie microwavable food is inelastic in nature, we can derive a conclusion that an increase in the price of the food leads to the fall of the quantity demanded by less than proportionate amount. Since our commodity is a luxury good, its advertising elasticity also influences its sales. The pricing that the organization should follow should be therefore kept after analyzing the cost of production and the market prices of competitors. Organizational goals regarding profit maximization are also to be considered while determining an optimum plan for pricing. Evaluating Financial Performance Evaluating a financial performance of an organization 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. According to Barron the performance of a business enterprise is affected 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. Financial analysis is an accounting tool that might be undertaken internally as well as externally. Measurement of
- 9. performances of the workers, the efficiency of the operations in the company in addition to credit policies are some reasons for internal ratio analysis while on the other hand externally probable creditors, investors and borrowers perform ratio analysis to understand the credit worthiness, investing returns and the financial standing of the company. Financial analysis is carried out by the analyst using the data provided by the company itself, financial disclosures by the company, the financial and economic data through external sources as well. Myers, (1962), defines ratio analysis as the study of relationships among various financial factors in business. There are many kinds of ratios which are classified according to their method of computation as well as their characteristics. Broadly the ratios can be segmented as ratios that reflect company’s position to face their obligation, the ones that reflect the relation 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. These ratios can be named as coverage ratios, return ratios, turnovers ratios and component percentages. The main types of ratios are liquidity ratios, financial structure or solvency Ratios, Profitability ratios, Activity ratios, Financial Leverage Ratio and Shareholders ratios. Actions to Improve Profitability and deliver more value to Stakeholders. There are various strategies that a company can use to improve profitability and hence adding value to stakeholders. Each strategy must be clearly analyzed to understand its impact to the company revenue before implementing it. One of them is by increasing the unit price of products. This may have a negative impact to the company in a situation where there exist substitutes. However, considering that the quantity being sold remains constant, raising the unit price of a commodity will definitely increase revenue per unit of goods sold. Another way is by increasing sells. Considering that the price is kept constant, selling, more products will yield more revenue to the
- 10. company. To implement these two strategies, the company can add more features to its products so as to exceed the market competition. By doing so, raising the unit price may not cause some consumers seek for cheaper substitutes. In order to increase sells, the company can increase production capacity of the plant. Advertising campaigns will also make the products reach more people and thus increasing market share. References Ames, M., (1983). Small Business Management. West Publishing Co. Baron, D. P. (2000). Business and its environment (3rd e.d) NJ: Prentice Hall. CNB (2004). Short-run food price prediction methods. Retrieved from http://www.cnb.cz Miller, D. W., & Starr, M. K. (1960). Executive decisions and operations research. Englewood Cliffs, N.J: Prentice-Hall. Myers, J. H. (1962). Reporting of leases in financial statments. New York: American Institute of Certified Public Accountants. Wagner, H. M. (1975). Principles of operations research: With applications to managerial decisions. Englewood Cliffs, N.J:
- 11. Prentice-Hall. Walter Nicholson, C. S. (2012). Microeconomic Theory: Basic Principles and Extensions. (11thed.). USA: Cengage Learning. Zelman, K. M. (n.d.). How to choose healthy frozen dinners. Retrieved from http://www.webmd.com Running head: DEMAND ESTIMATION 1 DEMAND ESTIMATION 10 Demand Estimation Demand Estimation Low-Calorie Microwavable Food Processing Company This company is involved in making low-calorie microwavable food. The company wants to ensure they maintain a continuous good performance in the market. Therefore, it is essential to estimate its demand, elasticity and project future performance. The following is a demand equation for the product and a table of its performance in 26 supermarkets nationwide. Demand equation: p=0.5q+70 Table 1: Demand, Price and Elasticity in the 26 Supermarkets, assume initial price and demand was 130 and 30 respectively. Quantity (Independent variable) %∆ in independent variable Price (Dependent variable) %∆ in dependent variable
- 17. $5,379,000,000 $5,341,000,000 $5,741,000,000 Units Produced 64,446,773 63,673,945 65,673,945 Price $83.46 $83.88 $87.42 2001-2002 2002-2003 2001-2003 %Change in Quantity -0.003016015 0.007731089 0.011565016 %Change in Price 0.001244 0.010322 0.010322 Elasticity Coefficient 2.425124846 0.748994536 1.12042869
- 18. Elasticity -0.412349905 1.335123224 0.892515524 Implications of the Elasticities The figures above depict the dominance of inelastic demand. They give an impression of small change in demand in spite of an observable change in price. Calculations were done according to the formula provided above. I would recommend that this firm should not cut the price to increase its market shares as according to the elasticities figures, there is relatively a small change in demand as a result of change in price (Barber, 2010). Demand, Supply and Equilibrium Curves Assume that the price changes are 100, 200, 300, 400, 500, 600 dollars. Supply function Q = 5200 + 45P with the same prices. Demand Curve Quantity Price 60 600 260 500 460 400 660 300 960 200
- 19. 1060 100 quantity price 9700 100 14200 200 18700 300 23200 400 27700 500 32200 600 Equilibrium Curve Price S Price D Quantity 100 600 60 200 500 260 300 400 460 400 300 660
- 20. 500 200 960 600 100 1060 Equilibrium quantity= 560 Equilibrium price= 350 dollars Factors that could change the supply and demand for the product There is a number of prevailing factors that could possibly change the supply and demand for the product. The most common one is price increases or decreases. An incremental decrease in product price leads to huge increase in the demand for the product. On the other hand, an increase in the product price leads to decrease in demand by a significant margin. As population rises, more and more people become aware of the product and therefore demand increases as a result. Due to this, the company is forced to supply more quantities of the product to satisfy the growing demand. They are not impressed in supplying more products in the market at depressed prices. Furthermore, available substitutes such as hot food supplies affect the demand and supply of the product. A number of people are able to acquire the same food products at restaurant or being supplied by other competitive companies leading to a drop in demand (Starr, 2011). Consumer tastes and preferences affect the supply and demand of goods and services in the market. Some consumers prefer cooking their own food rather than buying packaged
- 21. microwavable food. Again, consumer trends may shift basing on the fact that microwavable food is not safe. Another cause could be recession and high rates of unemployment. The recession is one good example of when and how change starts occurring in supply and demand. In the current recession that we are living in, people are losing their jobs and so they have to find ways to economize and make changes in the way they spend and what they purchase. Consumers also take in mind what is needed the most and what is considered a luxury or treat. People will often differentiate between their needs and wants. Under free market conditions, a negative shift in demand results in lower quantities demanded and as such, suppliers are inclined to reduce supply. A positive shift in demand leads to a rise in quantities demanded and a positive shift in supply as suppliers position themselves to take advantage of higher prices. As a supplier, the lower the price, the less I will supply to the market in a bid to push up prices when demand increases. With a rise in demand, I would supply more units to the market so that I can make more profits by charging more for the product (Palmer & Ontario, 2006). Competition from other substitutes should be contained by reducing the price of the goods and commodities sold. This will encourage consumers to opt for the cheaper commodity as opposed to the alternatives in the market. The same principle can be applied in situations where consumer tastes and preferences change in favor of a rival product. It should be noted that there is a minimum below which prices cannot be reduced due to overheads and incidental costs like repair and maintenance. In other instances, it may be prudent for the firm to invest in products that the consumers prefer rather than engage in expensive price wars. Primary Manner In Which Both The Short-Term And The Long-
- 22. Term Changes In Market Conditions Could Impact The Demand For, And The Supply Of The Product. Short-term changes in the market include seasonal supply of substitute commodity, seasonal product preferences, price fluctuations, inflation in economy among others. The short-term changes tend to create sharp increase or decrease in both demand and supply seasonally but in overall the price or demand deviation is maintained at manageable levels. On the other hand long-term changes in the market would involve customer shifting their trends permanently and adopting the usage of another better product leading to decreased demand and supply. Other factors that would play a great role in long- term changes in the market include change in technology, change of culture and lifestyle, change in economy among others. A change in technology would mean that people will cease to use the product as there are other better means of utilizing the product or get totally replaced products. This implies that demand will decrease substantially similarly to supply as prices will tend to decrease discouraging the suppliers. Change in feeding culture leads to permanent shift of consumer trends leading to a decrease in demand and thus the supply. In case the economic performance of a nation improves, consumer tends to shift to higher preferences and tastes lowering the demand and supply of the product (Palmer & Ontario, 2006). . Crucial Factors That Could Cause Rightward Shifts of the Demand and Supply Curves The factors that lead to rightward shift include rise in income. With increased income, consumers have extra or more money to spend particularly on normal goods. Hence, the demand on the product will increase despite of high prices offered.
- 23. Consequently supply will increase shifting both the curves of demand and supply rightwards. Also when the price of complement goes down and that of substitute goes up, demand and supply curves will shift rightwards as more people tends to prefer the product they can afford. Also the people preference may make them to like a certain product hence causing an increase in demand and thus the supply. This results in a rightward shift of demand and supply curve. Other cases include the situation where the consumer expect an increase in value of the product, hence increasing demand and supply thus the rightward shift. An increase in population too. Crucial Factors That Could Cause Leftward Shifts of the Demand and Supply Curves A leftward shift is caused by a decrease in income. The consumers have insufficient funds to spend and they spend the little they have on inferior goods. The demand for the product goes down. The suppliers are unwilling to supply more hence the leftward shift for both cases. An increase in price will discourage consumers from purchasing the product by causing them to look for a cheap substitute; this causes the demand and supply to decrease, consequently leading to a leftward shift. Change in tastes also causes the leftward shift of the demand and supply curves when the preference disfavors the product. References Barber, J. R. (2010). Elasticity. Dordrecht: Springer. Palmer, J., Roseman, E., Murgatroyd, S., Films for the Humanities (Firm), & TVOntario. (2006). Supply and demand. Princeton, NJ: Films for the Humanities and Sciences. Starr, R. M. (2011). General equilibrium theory: An introduction. New York: Cambridge University Press.