ECO550 Assignment 3: Long-Term Investment Decisions Assume that the low-calorie frozen, microwavable food company from Assignments 1 and 2 wants to expand and has to make some long-term capital budgeting decisions. The company is currently facing increases in the costs of major ingredients. Use the Internet and School databases to research government policies and regulation. Write a six to eight (6-8) page paper in which you: 1. 2. 3. 4. 5. 6. Outline a plan that managers in the low-calorie, frozen microwaveable food company could follow in anticipation of raising prices when selecting pricing strategies for making their products response to a change in price less elastic. Provide a rationale for your response. Examine the major effects that government policies have on production and employment. Predict the potential effects that government policies could have on your company. Determine whether or not government regulation to ensure fairness in the low-calorie, frozen 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. 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. 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. Use at least five (5) quality academic resources in this assignment. Note: Wikipedia does not qualify as an academic 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. RUNNING HEAD: Demand Estimation. Week3: Assignment1: Demand Estimation Student’s name: xxxxxxxxxxxxxx Instructor’s name: Dr. xxxxxxxxxxxx School’s name: xxxxxxxxxxxxxxxxxxNC Campus Course’s name: Eco550 (Managerial Economics and Globalization) Date: 10/20/2016 RUNNING HEAD: Demand Estimation. 1. Compute elasticities of each variable. Quantity demanded= -5200 – 42P+ 20PX +5.2I +0.20A +0.25M Where: p = PX= 500 A= $10,000 600 M= 5,000 I (SAMSA) = $5,500 Solution: QD= -5200 – 42(500) +20 (600) + 5.2 ($5,500) + 0.2 ($10,000) + 0.25 (5000) = -5200 – 21,000 +12,000 + 28,600 + 2000 + 1250 = 17,650. Outcome of the regression equation: = -42. Price elasticity (EP) = P/Q × (-42) = 500/ 17,650 × (-42) = - 1.18980 (Round off) = -1.19. Cross price elasticity. RUNNING HEAD: Demand Estimation. Ec = 600/ 17650 × 20 = 0.68. Income elasticity. EI = 5,500/17,650 × 5.2 = 1.62 Advertisement elasticity: EA= 10,000/ 17,650 ×0.2 = 0.11 Supply (microwave) elasticity: EM = 5000/17650 × 0.25 = 0.07. 2. Implication of each computed elasticity: In terms of short-term and long-term strategies. The price elasticity, (-1.19), insinuates that the product is price elastic but on a lower degree. This score highly implies that the demand of the commodity is greatly influenced by price change (Tuck, C. Clifford 2004). A follow up on this computation would mean that that the demand of the product would experience a decrease following price increase. Reduction in the price of the commodity on the other hand increases demand of the quantity. The cross process elasticity, 0.68, implies that the price of the microwave is fairly inelastic on the competitor’s prices. In a fairly inelastic demand, change in price in the home company does not accept the change in demand. An increase in price of a competing firm would however increase the demand of the product. The income elasticity, 1.62, depicts price elasticity. Price elasticity is drawn from the reasoning that the figure, 1.62, is more than one. One percent rise in the average income prompts RUNNING HEAD: Demand Estimation. an increase in the demand structure. The company, in the latter, may engage in the increase of pricing following the increase of the average area income. The advertisement elasticity outcome, 0.11, indicates price inelasticity. An increase of the advertisement’s expenses by one percent shoots its demand structure by 0.11%. In the short-run, the computation from the advertisement elasticity triggers an inelastic relationship with the demand movement of the microwave. This inelasticity suggests that the company, to improve its sales, should engage more in the advertisement advances. An increase in the price of the microwave would reduce the quantity demanded. The company should instead refrain from such strategies. The microwave elasticity computed as 0.07 implies; a one percent rise in the quantity (the number) of the microwaves triggers 0.07% rise of the product demand structure. These facts depict that the demand of the microwave is relatively inelastic. Pricing in this case does not affect the commodity’s demand. 3. Should the company increase or cut its prices in attempt of increasing market share? The firm is endowed with a great chance in gaining a large market share not only through price reduction of its commodity but also focusing on the preference of the consumers. From the computation, the price elasticity of the commodity exceeds one. A reduction is price in this case therefore increases the quantity demanded (Timothy 2014). The company would experience an increase in the market share. Price increase on the other hand builds negative forces that may sabotage the development of the firm in the business market. 4. Demand and supply graphical representations. RUNNING HEAD: Demand Estimation. Demand and Supply equations: QD= -5200 – 42P+20 (600) + 5.2 ($5,500) + 0.2 ($10,000) + 0.25 (5000) QD= 38,650 – 42P: QS = -7909.89 +79.1 P When P= 100 = Q= 34,450 When p= 100 QS= 0.11 P= 200 Q= 30,250 p=200 QS= 7,910.11 P= 300 Q= 26,050 P= 300 QS =15,820.11 P= 400 Q= 21,850 P= 400 P= 500 Q= 17,650 P= 500 QS= 31, 640.11 P= 600 P= 600 QS= 39,550.11 Q= 13, 450 QS= 23,730.11 Plotted Demand and Supply Curve: price 600 D S 500 400 300 200 100 S 0 D 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 RUNNING HEAD: Demand Estimation. Demand and Supply (QD, QS) C. Equilibrium both quantity and price. Solution: Quantity demanded = quantity supplied 38,650 – 42P= -7,909.89 + 79.1P 38,650 + 7909.89 = 79.1P + 42P P= 384.47 Q= 22,502.26 The equilibrium price and quantity on the diagram (with a colored line) is situated at the point where the supply and demand curve meets. The equilibrium quantity is viewed 22,503.26 Units while the price rates 84.47 Units. One of the most significant factors affecting the demand of the commodity is change in area income. Rise in income prompts a coinciding demand increase (Voon 2013). Decrease in income on the other hand decreases the quantity demanded. Decrease in the substitute’s goods prices would switch the consumers ‘preferences. Change in consumer taste and preference would also cause a shift in demand. Positive preference in this case would increase the demand. Negative preference on the other hand reduces the demand. Competitor pricing strategies would also alter the demand schedule of the product (Voon 2013). Other factors include change in the technological advancement, availability of labor production and of raw materials. RUNNING HEAD: Demand Estimation. 5. Supply and demand shifts. The demand curve position would shift to the right or left triggered by an alteration in the underlying determinant of demand. A shift to the right can be caused by an increase in consumer income. Income increase, a known fact, prompts an increase in the quantity purchased by a consumer. Increase in the price of the substitute goods is another essential factor that would trigger a demand shift (Timothy 2014). An increase in the consumer’s taste and preferences is another factor that would cause a shift in demand to the right. Other factors include fall in the price of complement, future expectation of price increase in the commodity and favorable government interventions. Demand shifts to the left triggered by a fall in the consumer income, a reduction in the substitutes’ prices, decrease in the consumer taste and preference, future expectation of reduction in prices and negative government influences. The position of the supply curve would shift to the left or right following the change in the underlying supply determinants. A decrease in the production costs, improvement of technology, easy availability of raw materials, tax reduction and increase in the government subsidies would trigger a shift in supply to the right (Mark 2013). On the other hand, an increase in the production costs, tax increase, raw materials unavailability, deprived technology and unfavorable government subsides prompts a shift in supply curve to the left. RUNNING HEAD: Demand Estimation. References Tuck, C.C (2004) Price elasticity Essential Economics; 2004. Voon J. &Geoff W. (2013) Demand and Supply Columbia Electronic Encyclopedia. 6th Edition; Feb 2013.Feb 2013. Katz & Lawrence F 1996 Shift in Labor and demand supply New England Economic Review; Review; May/Jun96 Skousen, M. (2013). “Economic Logic”. Fourth Edition. Regnery. Taylor T (2014) Principles of Microeconomics OpenStax College. Running head: OPERATIONAL DECISIONS ECO550 Assignment 2: Operations Decisions Student name: xxxxxxxxxxxxxxx Instructor name: Dr. xxxxxxxxxxxxx School name: xxxxxxxxxxxxxxxxxxx, NC Campus Course name: Eco550 (Managerial Economics and Globalization) Date: 11/11/2016 OPERATIONAL DECISIONS 2 Question one How to assess the effectiveness of a market structure The low-calorie frozen microwavable foods such as meat loaf meal, barbeque sauce among others face competition from the leading companies in the sector are Lean Cuisine and Healthy Choice. The assessment of the market structure on the company’s operations can take the following criteria: i) Creating a plan that gives an outline of how effectiveness can be assessed based on the operations of the market structure. ii) Carrying out an analysis of the long-run and the short-run cost functions for lowcalorie frozen microwavable foods with the given cost functions. This analysis would involve convenient strategies that would drive the entire process. Eliminating the irrelevant proceedings that are engaged in during the company operations and replacing them with actions that will help to curb down the circumstance. iii) Giving a suggestion on the pricing policy that will enable the organization to maximize their profits. iv) After the suggestion, creating an outline to evaluate the financial performance is key for the company. v) In support of the improvement of the company’s profitability and increase of stakeholder value, two recommendations would be stipulated inclusive of proper guidelines on how to implement them. Question two Factors that may cause change on the business operations OPERATIONAL DECISIONS 3 The analysis carried out shows that the company’s market structure is monopolistic in nature. The operational changes arise from the factors that influence monopolistic competition (Nakaido 2015). The major factors include: a variety of competing fringe firms and few firms being dormant. The three leading companies in the low-calorie frozen microwavable sector are Cuisine, Healthy choice and Lean. The data analyzed in 2012 by the industry indicates that the three companies make a composition of 42.9% of the market share. This shows that they are the dominant firms; however, there are also fringe firms around such as Trader Joe’s, Kashi, Michelina’s and Amy’s. The fringe firm in this type of market structure requires the following to assess the level of effectiveness: I. Analyzing all the products available and determining their suitability. The key target is ensuring that the products are not perfect but close substitutes between each other. Considering the low-calorie foods, the expectation is that the products are closely substitutable and the choice is dependent on the person’s preference on the available products. II. Checking the probability of the company to venture into the market. In scenarios where blatant barriers are formed and overcoming them is a challenge, there is a high chance that the market structure is different. However, because the low-calorie frozen foods sector comprises of a wide range of products, entering the market will be easy. III. The company compares the price levels and the quantity their competitors provide to the consumers. The expected outcome is that the variation in prices is high with unlimited number of quantities offered. The result arises out of the competitor’s desire to win more consumers in the market. OPERATIONAL DECISIONS 4 The outcomes show that this kind of a market structure is important to an entrant company in developing a profitable enterprise. Question three Analyze the major cost functions both short and long run In the analysis of the functions for low-calorie frozen microwaveable food we can be able to find relevant decisions for the company. TC = 160,000,000 + 100Q + 0.0063212Q2 VC = 100Q + 0.0063212Q2 MC= 100 + 0.0126424Q The first step, is getting the average total cost so as to distinguish between the short and long run equations. The average total cost is calculated by taking the total cost divided by the quantity (TC/Q) ATC = 160,000,000 + 100 Q + 0.0063212Q2 Q Q Q = 160,000,000 + 100 + 0.0063212Q Q Secondly, the average variable cost (ATC) This is possible using AVC= TVC / Q AVC= 100Q/Q + 0.0063212Q2 / Q = 100 + 0.0063212Q Third step is finding the solution for Q ATC = MC 160,000,000 / Q + 100 + 0.0063212Q = 100+ 0.0126424Q OPERATIONAL DECISIONS 5 160,000,000 / Q + 0.0063212Q = 0.0126424Q (this is after subtracting 100 from both sides) Next, 160,000,000/ Q=0.0063212Q2 after we subtract 0.0063212Q from all sides and multiply them by Q to obtain 25,311,649,686.786 = Q2 Getting the square root gives us the value of Q= 159,096.353 The value of Q represents the number of output units with the aim of minimizing the value of average total cost. The same number of units is the order output of obtaining the breakeven point. The value at the breakeven is relevant to the company in making decisions on the progress of the firm both in the short and long run (Lippi, 2014). Question four Possible circumstances under which a company may discontinue its operations The ATC cost function is significant in determining the breakeven point and shut down levels of the company. Using the computations in question three above, the value of Q will enable us to obtain the breakeven value. At breakeven, 160,000,000/159,096.353 + 100 + .00632212 (159,096.353) =2011.36 the value is in cents, therefore, when the costs fall below $ 20.11 chances are that the company never covered for the total fixed cost. The result in the short run implicates that the business will run smoothly only if the company will set new strategies to reduce on the future costs (Scott, 2013). However, if at a point the company makes negative fixed cost the only alternative would be to shut down. To cover the possible shut down challenge the company needs to be persistent in calculating the breakeven point as well as setting full price for some items in order to compensate the deficits in other fixed and variable costs. Question five Suggest one pricing policy OPERATIONAL DECISIONS 6 For profit maximization we use the equation MR= MC that is, 3500 – 0.02Q = 100+ 0.00126424 solving the equation the value of Q= 104159.008 The implication is that profits will be maximized when the output hits the Q value. To find the price where profits are maximum we solve for P where, P = 3500 – 0.01(104159.008) P= $ 24.58 The pricing policy that can be put in place for the product could be a non-linear pricing or a multi-unit policy (Evans, 2012). In this type of a policy, the price of the product will vary depending on the number of units bought by the consumer. Question six Analyzing the financial performance of the company involves the following i. Finding the ATC in the short run, the variable Q is replaced with its actual value ATC= 160,000,000 / 104159.008 + 100 + 0.0063212(104159.008) = 2294.523 The interpretation is that the company will have to spend $ 22.95 so that the price is set at $ 24.58 ii. Analyzing the profit levels using the equation TR= P* Q, TR= 2458.410 * 104159.008 = 238995239.513 To obtain the short run profits (TR – TC) that is: 256065546.857- 238995239513 = 17070307.344 cents an equivalent $ 170, 703.07 The profits are so low and this may result to future profit saturation. In addition, the shareholders may withdraw their investments before the profit is at zero. Question seven Recommendations on how to improve the profits OPERATIONAL DECISIONS 7 To improve on the company’s profit, more concern may be given to the best sellers of the specific products. Consequently, there will be constant in-flow of cash flows to enable as cover insufficiencies of the slow moving sectors. Secondly, the company can review the contracts made with suppliers to enhance cost reduction as well as maximizing the quality of output (Yang, 2010). Increasing the quality requirements for the personnel working with the company could also improve on the company’s operations towards getting more profits. To implement the strategies, I will setup a meeting with all staff to inform them on the changes about to be put in place. The next step will be to work hand in hand with the marketing team on which areas should be focused on and the respective products for the region. The issue on cost reduction will be affected after meeting the firm’s suppliers and in case they are not flexible I will look for new suppliers. On the same strategy the company will outsource experts in processing sector to help in the training of the staff on their specific roles and other skills that will help to improve their performance. Outsourcing is also useful in minimizing wastage of resources in the company. OPERATIONAL DECISIONS 8 References Evans, C. A. (2012). Road work: a new highway pricing and investment policy. Brookings Institution Press. Lippi, F. &. (2014). Price setting with menu cost for multiproduct firms. Econometrica, 82(1). 89-135. Nikaido, H. (2015). Monopolistic Competition and Effective Demand. (PSME-6). Princeton University Press. Scott, J. &. (2013). Market structure and technological change (Vol. 18). Taylor & Francis. Yang, B. W. (2010). Linking organizational culture, structure, strategy, and organizational effectiveness: Mediating role of knowledge management. . Journal of Business research 63(7), 763-771.
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