Assignment 2: Operations Decision
Assignment 2: Operations Decision
IntroductionCurrently, the options for microwave foods with low calorie have widened in the market. As the income of the people has gone up, the consumers can now have higher affordability towards an easy way of living; thus allowing for a change in the traditional rigorous ways of cooking used in yesteryears. Microwaves have now somewhat replaced the cooking methods used traditionally. As the popularity of microwaves has increased, the use of food items related to the same has also enhanced. Since there is such wide variety available for products, there can be an easy target for microwavable foods that are healthy in nature. A typically good food with low calorie would include a decent protein source and some amount of fiber (almost 3 grams) for providing satiety, and a proportionate weight of sodium, which is about 600 milligrams.
The manufacturing of some of the available options in the market is done by Healthy Choice and Lean Cuisine. Both of these compete in the typical frozen foods market. The establishment of Lean Cuisine was done in 1981, and the growth has been continuous since then in the US market, Canadian market and Australian market. The owner of the Company is Nestle, and there is an offer of a variety of category of frozen foods and thus is a leader in the choices of low-calorie food options.
Another popular supplier for frozen food which is also a leader in the low-calorie segment is the Healthy Choice, which is extensively produced by the manufacturer, ConAgra. They stand as the biggest competition to Lean Cuisine. There are three criteria in the market which divide the segments in which the market are divided: behavioral, psychographic and variables of the profile.
The variables of behavior are the ones that are taken as a part of the product, and the patterns in consumer buying like purchase volume and frequency could be taken as the fundamental bases for the same. The use of psychographic variables is relevant when there is a correlation between the consumer lifestyle or personality and the behavior of purchase of the consumers. For consumers who stick to varied lifestyle and personalities, there may be possible prejudice towards a particular brand or product type. The choices that they make are based on their standing in the social and economic front. Profiling, as such, may not be taken as a crucial market segmentation criterion. When the possible differences in the market have been identified based on certain features, the channel of the exhibition is also to be divided into the markets (McGuigan, Moyer, & Harris, 2014). The variables of the profile such as geographic places or groups of similar socio-economy are crucial in deciding the target audience for a given product. For the determination of food industry structure of the market, the first consideration would be the target audience. The economic growth pattern of the food industry as a whole needs to be studied and is quite important. The objectives and motives of growth that is determined by the Company for itself should be clear. There needs to be a concise decision on the scale of operation, whether there is going to be catering to the local market, global market or domestic market.
The continuity of the microwave industry in the low-cost segment will be dependent on some of the factors. The first factor could be the unavailability of adequate capital for supporting the continuity of business enterprise. The other factor is chances of business liquidation and discontinuation in case there is a lack of good management of inventory. Inventory is mandatory for the maintenance of equilibrium given a certain amount of supply and demand. In case there is a disturbance in this equilibrium, there might result in a case when the business is shut down. The third factor is the business growth at unexpected levels so that operations need to be discontinued. In case, the business is able to expand the management capacity and operations limit; the business may be decided to discontinue for capacity reasons. The fourth factor is the inability of the company to deal with new and existing competition in the market, which results in business failure.
Thus, it can be said that competition, a low degree of sales and low level of managing ability, and crisis at the financial level could be the primary reasons why there may be a condition where the business needs to cease.
Now, we may consider the role of pricing policy for the maximization of profits. Pricing is one of the major components that determine the survival of products in the market.
It is a fact that there cannot be one accurate single method that determines the pricing strategy for a Company; however, there are influencing factors like product demand, the cost of production, position in the market and competition, which combine to help determine the product prices.
For the maximization of profits for a Company, optimal pricing should be the focus of an organization. This is the price level at which the willingness of the consumer towards the purchase of the product is high. Competitive pricing could also be utilized by companies with many competitors so that the prices are on par with what others have been offering. The inelasticity of low-calorie microwave foods demand allows us to draw some conclusions about the market. This reflects that in case there is a price increase of the food items, the consumers will not easily shift to other products i.e. the effect of price is not reflected proportionately on the effect on demand. Since the commodity in question is a luxury good, there is also the considerable effect of the advertising on these items. The pricing analysis by the organization is to be based on analysis of competitor prices and cost of production for the Company products. Another important factor to take into consideration would be the goals of the organization with regards to profit maximization and optimal utilization of resources. The evaluation of the economic performance of an organization reflects that there should be subjective techniques of how effectively the assets of the business are utilized in the primary business operations and revenue generation. This statement is also used to evaluate the overall financial being of an entity in general for a given time period. It can also be used to compare related companies in a given industry so that the sectors can be taken in aggregate.
QS = 5200 + 45P
P = -5200/45 + Q/45
QD = 211,000 -10P
P= 21100-0.10 Q
21100-0.10Q=-5200/45+ Q/45
21100+5200/45=0.10Q+Q/45
954700/45=5.5/45Q
Q=173581.82
P=3741.82
Thus, the price at equilibrium is 3742 cents and the quantity at equilibrium is 173582 units. In addition, the price and quality at the equilibrium could be reflected at a point at which there is a meeting of demand and supply. As given in the equation of demand, there can be a change in the low-calorie food demand in case there is a change in consumer income, competitor product pricing, and the prices of those products which are correlating, which mean microwave oven. There can also be a change in case the preference of consumers change for instance there is increased awareness regarding low-calorie food. There can be a change in supply in case there is an alteration in product suppliers' quantity, advances in the production technologies, and other factors like change in the availability of raw material, labor and other factors. These factors directly affect the costs of production for low-calorie segment Company of foods which may fall in the monopoly segment of market (Scholasticous, 2011)
Total Cost (TC) = 160,000,000 – 115.56Q + 0.01111Q2
Variable Cost (VC) = – 115.56Q + 0.01111Q2
Marginal Cost (MC) = -115.56 + 0.02222Q
A)
Average total cost (ATC)=160000000/Q-115.56+0.01111Q
There is minimization of ATC at ATC=MC
160,000,000/Q-115.56+0.01111Q=-115.56+0.02222Q
160,000,000=0.01111Q2
Q= 120,006
The minimum value for ATC,
160,000,000/120006-115.56+0.01111Q
1333.26-115.56+0.01111*120006
1217.70+1333.26
=2550.97 UNITS
AVC=--115.56+0.01111Q=1217.70
In order to get profit, the price of the product (P) should be larger than the average total cost (ATC) given the optimal output level (Q). The price of the firm should cover the AVC (average variable costs) given the short run and ATC (Average Total costs) given the long run for the continuity of operations (Short Run and Long Run Costs, 2015). The price is good enough for covering AVC in the short period and covering ATC in the long period.
P= 21100-0.10 Q
Total Revenue (TR) = (P*Q) = 21,100 Q – 0.10 Q2
Marginal Revenue (MR) = (dTR / dQ) = 21,100 – 0.20 Q
For the maximization of profit, MR=MC
21,100-0.20Q=-115.56+0.02222Q
21,215.56=0.22222Q
Q=95470.97
P=21100-0.10Q=11552.90
P=11552.90
The price is greater; however the output is lower.
Here,
Total Revenue (TR) = 21,100 Q – 0.10 Q2
TC = 160,000,000 – 115.56Q + 0.01111Q2
Producer Surplus (PS) =TR-TVC
Variable Cost (VC) = – 115.56Q + 0.01111Q2
21100Q-0.10Q2 +115.56Q-0.01111Q2=21215.56Q-0.11111Q2
Q (21215.56-0.11111Q)=0
21215.56=0.11111Q
Q=190941.95
Profits=190941.95-160,000,000
For the maximization of profits, the choice of monopoly will be the production of such output level at which the marginal cost equals the marginal revenue (Varian, 2011). This is because inline perfectly competitive markets, monopoly functions at a market demand curve that is negatively sloped. This means that the market price is higher than the marginal revenue. For the sale of one additional unit, the monopoly firm should decrease the price of overall units that needs to be sold in case there is the generation of extra demand, which makes up for the additional marginal unit. The output level for the maximization of profit for a firm is then set at the level of Q.
If we assume that price is greater than the average cost, there will be profit in this level of output. The monopolist will then have nil alternatives for the alteration of output levels until the time there is a change in demand or cost conditions.
Given the long run of the firm, there is operation at the LAC minimum point and demand curve, which is defined by tangency of market price and LAC minimum point.
Here,
Q= 120,006
The MINIMUM VALUE OF ATC is given at,
160,000,000/120006-115.56+0.01111Q
=1333.26-115.56+0.01111*120006
=1217.70+1333.26
=2550.97 UNITS
The total profit that a monopolist earns is given by the quantity of sold units into the profit per unit. The value of these profits will be positive in case the market price is greater than average total cost. In cases where the price is greater than average cost, there can be operation by the monopolist only for a long term loss, and there is a decline in market serving. It is assumed that there is no entry possible for a monopoly market, there can be positive profits to a monopolist even for the long run.
The exit of the firm reduces negative profits of the economy, and the entry reduces favorable economic profits. Zero economic profit is made by perfectly competitive firms in the long run (Walter & Christopher, 2012).
What about the cases where firms have experience of economies of scale? There will be a movement of average total cost to another one so that the capacity is extended. Ultimately, there will be divergence to ATC curves which exist on the scale that is most efficient, and the firm is then diverted towards a breakeven point in the curve of ATC.
Eventually, it will reach ATC curves that exist at the most efficient scale and then the firm will be pushed to the breakeven point on that ATC curve
References
Price Elasticity Of Demand Definition | Investopedia. (2003). Investopedia. Retrieved 10 May 2016, from http://www.investopedia.com/terms/p/priceelasticity.asp
McGuigan, J., Moyer, R. C., & Harris, F. (2014). Managerial Economics. : Cengage Learnng.
Scholasticous, K. (2011, January 1). Monopolistic Competion Example. . Retrieved , from www.buzzle.com
Short Run and Long Run Costs. (2015). Boundless. Retrieved from https://www.boundless.com/economics/textbooks/boundless-economics-textbook/production-9/production-cost-64/short-run-and-long-run-costs-242-12340/
Varian, H. R. (2011). Intermediate Microeconomics: A Modern Approach (8th ed.). NY: Norton
Walter N., Christopher S. (2012). Microeconomic Theory: Basic Principles and Extensions (11th ed.). USA: Cengage Learning
