1. Plan for the assessment of Market structure Effectiveness for Operations of the Company.
Analysis of the performance of microwave category can be done through the increase or decrease in the demand between years. The analysis shows that the demand is ever increasing for microwave category products. The perceived advantage of using microwave foods has increased as the life of people is becoming more and more complex. The advantages could be summarized as time saving, greater appeal since it is a gourmet meal and the variety provided. The multi-use of the products at any time of the day in the form of breakfast, dinner, as well as lunch, is the reason for the high appeal of these products.
The use of products from the microwave has drastically increased as the commonality of the microwave is increased. The customers are satisfied with the benefits and the product offerings as a whole; however it is found that there is growing concern over the quotient of nutrition in the food so that the calorie level in the food is maintained. A brief analysis of the industry shows that there are two main competitors, namely Healthy Choice and Lean Cuisine. They have a higher market share in comparison to other players. The competitors are old players in the market who fall under global brands and have a global presence. The parent brand of Lean Cuisine is Nestle, established in 1981 and Healthy Choice is Con Agra, established in 1989.
There are a number of factors based on which the categorization can be done. These factors are the psychographic considerations, the profile of the consumers and the variable related to behavior. The process of segmenting and profiling allows better decision making to the ones handling markets and its differences. The significance is added to the geographic and other variables which make help differentiate the product in the group of target customers. The differences in consumer preference and behavior are because of the changes in their perception regarding the features of the product, the usage dimensions, purchase readiness and the emotional connection with the brand. The point of equilibrium, i.e. the point where demanded quantity is equal to supplied quantity is given by the following equation, where QD= Quantity demanded, QS= Quantity supplied
QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
QD = - 5200 - 42P + 20*600 + 5.2*5500 + .20*10000 + .25*5000
QD = -42P + 38650
QS = -7909.89 + 79.1P
Here,
26770 -42P = -7909.89 + 79.0989P
Or, P = $286.38
QD is 14742 units
Thus, the point of equilibrium is at price of $286.38 and quantity of 14742 units.
Given the scenario, there is the high importance of customer profiling for the purposes of market segmentation. For this, the identified variables of the profile need to be considered. The target market for the whole food industry is determined by the target customers, followed by which the market size determination will occur.
Microwave industry is a low-cost one, and thus, the survival of this industry depends on the adequacy of capital and inventory, adequate demand and supply, growth in the prospects of the business, higher competency, and others. In case these are absent, small companies are bound to stop their operations. Sales can only be generated by a good and inclusive policy of pricing. In the absence of these essential factors, a business cannot enhance and expand the operational efficiency. The demand will not be met by the company as a result of a shortage of inventory, and the closing will be the ultimate fate of the business.
The gaining of maximum profit for the Company depends on the pricing decisions taken. Optimal price needs to be selected, which is the price point at which the purchase intention of the customers is strengthened. Advertising also plays a key role. Elasticity and the product attributes need to be considered in advertising and promotion (Managementstudyguide.com, 2015). Elasticity affects the effectiveness of the advertisements to a great extent.
2. Likely factors that might have caused the change
The main feature of the players of a monopolistic market is that there is a challenge among the firms based on a change in prices, which reduces profits (Diffen.com, 2015). Innovation is the key for older to succeed and sustain. The change in demand also revolves around these factors. The main causes of change in demand could be:
Differences in the income level over time
Change in strategies of price by competitors
Market value of raw materials which affects the cost of production
Change in market nature and structure
3. Analysis of the major short run and long cost functions for the low-calorie, frozen microwaveable food company.
When we consider the short run in monopolistic competition market, the level of marginal cost is lower than the price. Thus, the profit is reduced. The firms are free to enter and exit and thus as the number of players grows; the prices will go down with the increase in supply level. The demand for the existing firms is quite fluctuating because of the fact that they are continually challenged by the newer firms who are lured into the industry by higher profit margins.
When we consider the long run, the amount of marginal cost will be same as that of the amount of marginal revenue. As there is an increase in the time period, the amount of profit gets reduced to nil as the effect of firms. When the level of prices is above the total costs put into the product, a firm will be able to gain profits.
In the short run, the price should cover for the average variable costs of the Company. This facilitates the survival of the Company in all the following years.
Using the equations for various variables used,
Total Cost: TC = 160,000,000 +100Q + 0.0063212Q2
Variable Cost: VC = 100Q+ 0.0063212Q2
Marginal Cost: MC =100+ 0.0126242Q
Average Total Cost: ATC=160,000,000/Q +100 +0.0063212Q
Then,
QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
QD = - 5200 - 42P + 20*600 + 5.2*5500 + .20*10000 + .25*5000
QD = -42P + 38650
P = 920.24 - Q/42
Now,
TR = P*Q
TR = 920.24Q – Q2/42
The profit maximization condition is,
MC = MR
100 + 0.0126424Q = 920.24 – Q/21
Q = 13666.6
P = 594.61
Calculation of the ATC value:
ATC =160,000,000/13666.6+100+0.006312*13666.6
ATC = 11707.4+100+86.26
= 11893.66
Average Variable Cost (AVC) = 100 +0.0063212*13666.6 =186.26
The above mathematics makes it clear that the AVC is lower than the price. This means that in the short run, there are profits in continuation of the operations for foods of low calorie. When we consider the long run, there is, however, a contrast and the operations need to be shut down as the price is lower than the ATC.
4. Possible circumstances under which the company should discontinue operations:
Competition is the determinant of how the Company operates, and the failure of the company to bring in differentiation and competitive prices will lead to discontinuation of operations. Lack of finances could also be the reason for the ceasing of operations sometimes. At other times, the scarcity of raw materials could also be the reason. This means that the discontinuation of operations depends mostly on the incompetency of the company to manage its internal and external environment (Spaulding, 2015).
5. A pricing policy that will enable low-calorie, frozen microwavable food company to maximize profits.
The best type of pricing for the Company in the given situation would be marginal cost pricing. It is the type of pricing measure where the business trends are set in such a way that there is the maintenance of price of the product at a point when marginal cost or additional cost is integrated into each extra unit produced (Accountingtools.com, 2016). The producer integrates this additional cost to the whole sum so that the units of raw material used and labor are accounted for. In case there is a low margin on sales, the added costs will be covered by the increased price levels. If a Company wants to have continuous gains, the factor that they need to consider is that ATC should always be lower than the price of the product, and the condition is that the highest level of output is produced. The maintenance of profit is thus dependent on the fact that the average cost should be lower than the price for the short run, and average total cost should be lower than the price in the long run.
Here,
P = 920.24 - Q/42
Total Revenue (TR) = P x Q = 920.24Q – Q2/42
Marginal Revenue (MR) = dTR / dQ =920.24 – Q/21
The condition for profit maximization is,
Marginal Revenue (MR) = Marginal Cost (MC)
920.24 – Q/21 = 100 + 0.0126424Q
Q = 13611.4
P = 920.24 – 13611.4/42
P = 1244.33
Thus, there is inelasticity in the frozen foods’ demand, as denoted in the calculation. The implication is that increase in price creates a decrease in quantity but at a proportion lower than the rise in the price.
6. Plan to evaluate financial performance:
Considering that it is a monopolistic market, there will be the entry of many new players since they see that the profit margins are higher. The existing firms need to take the help of advertising and promotions for maintaining market position. The survival in the monopolistic market would mean that the expenses on promotions are increased. This creates a lag in the profit for the short period. But if we consider the long run, the investments made in promotions will help tackle the competition created by the newer players that enter the market.
As new firms enter, the price levels will also decrease. The amount spent on advertising will generate good results for the Company. Another factor to be borne is that increased profits mean that there is a subsequent loss in a surplus of consumers and producers.
Given,
Total Revenue (TR) = 920.24Q – Q2/42
Total Cost (TC) = 1600,000,000 +100Q + 0.0063212Q2
Producer Surplus (PS) = TR - TVC
Variable Cost (VC) = 100Q + 0.0063212Q2
Producer surplus = 920.24Q – Q2/42- 100Q - 0.0063212Q2
= 820.24Q – 0.0301307Q2
= 820.24*13611.4 – 0.0301307 * 13611.4 * 13611.4
Profit = 185270209.96
Taking the long run, there will be profits for a Company in the monopolistic market if the demand curve aligns with the ATC curve, being tangent to it (M. 2016). This will create only nominal profits for the Company, and there will not be super profits as the profits are divided among many players.
Here, Q= 13666.6 units
Value of Average total cost: 160,000,000/13666.6+100 +0.0063212*13666.6 =1333.26
115.56 + 0.01111 * 120,006 =1217.70 + 1333.26
= 11164448.37
7. Recommendations:
The recommendations could be summarized as:
The investment in marketing activities should be increased.
Researches should be conducted to tap changing customer preferences and market trends.
Long run and sustainable strategies should be developed.
Innovation and differentiation should be focused.
Product line should be expanded.
Proper STP should be followed.
References
Diffen.com,. (2015). Monopoly vs Oligopoly - Difference and Comparison | Diffen. Retrieved 7 November 2015, from http://www.diffen.com/difference/Monopoly_vs_Oligopoly
Managementstudyguide.com,. (2015). Objectives and Importance of Advertising. Retrieved 7 November 2015, from http://www.managementstudyguide.com/objectives-importance-of-advertising.htm
Spaulding, W. (2015). Monopolistic Competition: Short-Run Profits and Losses, and Long-Run Equilibrium. Thismatter.com. Retrieved 7 November 2015, from http://thismatter.com/economics/monopolistic-competition-prices-output-profits.htm
Accountingtools.com,. (2016). Marginal Cost Pricing - AccountingTools. Retrieved 2 February 2016, from http://www.accountingtools.com/marginal-cost-pricing
M. (2016). Economics: Marginal Cost and Average Cost curves.Economicsmicro.blogspot.com. Retrieved 2 February 2016, from http://economicsmicro.blogspot.com/2008/11/marginal-cost-and-average-cost-curves.html
