​Assignment 2: Operations Decision

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Assignment 2: Operations Decision

Due Week 6 and worth 300 points

Using the regression results and the other computations from Assignment 1, determine the market structure in which the low-calorie frozen, microwavable food company operates.

Use the Internet to research two (2) of the leading competitors in the low-calorie frozen, microwavable food industry, and take note of their pricing strategies, profitability, and their relationships within the industry (worldwide).

Write a six to eight (6-8) page paper in which you:

  1. Outline a plan that will assess the effectiveness of the market structure for the company’s operations. Note: In Assignment 1, the assumption was that the market structure [or selling environment] was perfectly competitive and that the equilibrium price was to be determined by setting QD equal to QS. You are now aware of recent changes in the selling environment that suggest an imperfectly competitive market where your firm now has substantial market power in setting its own “optimal” price.
  2. Given that business operations have changed from the market structure specified in the original scenario in Assignment 1, determine two (2) likely factors that might have caused the change. Predict the primary manner in which this change would likely impact business operations in the new market environment.
  3. Analyze the major short run and long cost functions for the low-calorie, frozen microwaveable food company given the cost functions below. Suggest substantive ways in which the low-calorie food company may use this information in order to make decisions in both the short-run and the long-run.

TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100 + 0.0126424Q

  1. Determine the possible circumstances under which the company should discontinue operations. Suggest key actions that management should take in order to confront these circumstances. Provide a rationale for your response. (Hint: Your firm’s price must cover average variable costs in the short run and average total costs in the long run to continue operations.)
  2. Suggest one (1) pricing policy that will enable your low-calorie, frozen microwavable food company to maximize profits. Provide a rationale for your suggestion.

(Hints:

  • In Assignment 1, you determined your firm’s market demand equation. Now you need to find the inverse demand equation. Having found that, find the Total Revenue function for your firm (TR is P x Q). From your firm’s Total Revenue function, then find your Marginal Revenue (MR) function.
  • Use the profit maximization rule MR = MC to determine your optimal price and optimal output level now that you have market power. Compare these values with the values you generated in Assignment 1. Determine whether your price higher is or lower.)
  1. Outline a plan, based on the information provided in the scenario, which the company could use in order to evaluate its financial performance. Consider all the key drivers of performance, such as company profit or loss for both the short term and long term, and the fundamental manner in which each factor influences managerial decisions.

(Hints:

  • Calculate profit in the short run by using the price and output levels you generated in part 5. Optional: You may want to compare this to what profit would have been in Assignment 1 using the cost function provided here.
  • Calculate profit in the long run by using the output level you generated in part 5 and cost data in part 3 and assuming that the selling environment will likely be very competitive. Determine why this would be a valid assumption.)
  1. Recommend two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders. Outline, in brief, a plan to implement your recommendations.
  2. 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:

  • Analyze short-run and long-run production and cost functions.
  • Apply macroeconomic concepts to changes in global and national economies and how they affect economic growth, inflation, interest rates, and wage rates.
  • Evaluate the profit-maximizing price and output level for given operating costs for monopolies and firms in competitive industries.
  • 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.


NOTE: Find in the attached document; 1.) Assignment 2 Instructions Review. 2.) IBIS Industry Report 31141 Frozen Food Production in the US.pdf (2.449 MB). 3.) Assignment 1 Answer. 4.) Assignment 1 Graph

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ASSIGNMENT 2 INSTRUCTIONS ECO550 From Assignment 1 • From Assignment 1, you will use the following information: Qs = -7909.89 + 79.1P Qd = 38,650 – 42P P = 384.48 cents and Q = 22,502 units Question 1 • Outline a plan that will assess the effectiveness of the market structure for the company’s operations. Note: In Assignment 1, the assumption was that the market structure [or selling environment] was perfectly competitive and that the equilibrium price was to be determined by setting Qd equal to Qs. The market structure in the first assignment was competitive. This means that the firm does not have control over the price and it has to charge the equilibrium price. You are now aware of recent changes in the selling environment that suggest an imperfectly competitive market where your firm now has substantial market power in setting its own “optimal” price. Question 1 Instructions • Since the company has control over the price, it has to decide how much to charge and how much to produce to maximize profit. • The profit-maximizing/loss-minimizing quantity and price can be determined by setting the MR = MC. This involves the following. o Find the total revenue: TR = P x Q o Find the marginal revenue by calculating the derivative of the total revenue function. o Set MR equal to the provided MC function and solve for Q, and then for P. • Based on the results, the company should make a decision to continue producing or shut down. Question 2 • Given that business operations have changed from the market structure specified in the original scenario in Assignment 1, determine two (2) likely factors that might have caused the change. Predict the primary manner in which this change would likely impact business operations in the new market environment. Question 2 Instructions • Consider the change in the degree of competition. • Review the sections “Industry Performance” and “Competitive Landscape” in the IBISWorld report provided. • Factors that might have caused change could be for example consolidation of the industry, i.e., firms become bigger and have now some control on the price. Also, firms can differentiate their product from the products of their competitors, which again results in more control over the price. Firms' actions are interdependent and now their decisions are affected not just by the demand and supply conditions, but by what moves their major competitors make. These are just examples. You might come up with other factors. Question 3 Analyze the major short run and long cost functions for the low-calorie, frozen microwaveable food company given the cost functions below. Suggest substantive ways in which the low-calorie food company may use this information in order to make decisions in both short and the long-run. TC = 160,000,000 + 100Q + 0.0063212Q2 VC = 100Q + 0.0063212Q2 MC= 100 + 0.0126424Q Question 3 Instructions • To maximize profit, the firm has to find ways to maximize its total revenue and minimize its cost. You should also consider the difference between short and long run. In the short run, at least one of the costs is fixed. In the long run, all costs can be changes, i.e., all costs are variable. A review of the IBISWorld Industry Report on the frozen food production in the US can also help you answer this question. The cost functions affect the profit. The cost functions are to be used to answer question 4 as well. Question 3 Instructions • Using the provided cost data for the firm, determine whether the firm is making a profit or a loss by charging the equilibrium price determined in Assignment 1. o Calculate the total revenue. o Calculate the total cost. o Find the difference between TR and TC, which is the profit or the loss. o Review the section “Cost Structure Benchmarks” (p. 22) in the IBISWorld report. Question 4 • Determine the possible circumstances under which the company should discontinue operations. Suggest key actions that management should take in order to confront these circumstances. Provide a rationale for your response. • Hint: Your firm’s price must cover average variable costs in the short run and average total costs in the long run to continue operations. Question 4 Instructions • Here, you have to find the profit maximizing or loss-minimizing quantity and price. Then, determine whether the company is making a profit. To find the value of Q and P, you should use the marginal rule MR = MC. • MC function is given. • You should calculate MR by using the demand function from Assignment 1: Qd = 38,650 - 42P. o First, inverse the demand function to show the price in terms of quantity: P = 920.238 - 0.0238Q. o Then, find the TR function, which is equal to price times quantity TR = (920.238 - 0.0238Q)*Q = 920.238Q - 0.0238Q2. o Finally, find MR which is the derivative of TR with respect to quantity, i.e., MR = 920.238 - 0.0476Q. Question 4 Instructions • Next, set MR equal to the MC given in the second assignment and solve for the profit maximizing or loss minimizing Q and P. • When you find the values of Q and P, you can plug in the number for Q into the TR function to find the TR and in the TC function, to find the TC. Question 4 Instructions • Then, subtract TC from TR to find the total profit. o If you get a negative number, the firm is making a loss. o If the number is positive, the firm is making a profit. o If the firm is making a loss, you should figure out whether the firm should continue to produce at a loss in the short run, or shut down. To answer this question, you should compare the TR with VC, or price with AVC. If the firm is making a loss and the TR is higher than VC or the price is higher than the AVC, then it would be better off producing rather than shutting down because it will be able to cover some of its fixed cost. But if TR is smaller than VC, or if price is smaller than AVC, the firm will be better of shutting down. Question 5 Suggest one (1) pricing policy that will enable your low-calorie, frozen microwavable food company to maximize profits. Provide a rationale for your suggestion. Question 5 Instructions Hints: • In Assignment 1, you determined your firm’s market demand equation. Now you need to find the inverse demand equation. Having found that, find the Total Revenue function for your firm (TR is P x Q). From your firm’s Total Revenue function, then find your Marginal Revenue (MR) function. • Use the profit maximization rule MR = MC to determine your optimal price and optimal output level now that you have market power. Compare these values with the values you generated in Assignment 1. Determine whether your price higher is or lower. • Use the profit-maximizing rule MC = MR to find the price and quantity that maximize profit. Question 6 • Outline a plan, based on the information provided in the scenario, which the company could use in order to evaluate its financial performance. Consider all the key drivers of performance, such as company profit or loss for both the short term and long term, and the fundamental manner in which each factor influences managerial decisions. Question 6 Instructions Hints: • Calculate profit in the short run by using the price and output levels you generated in part 5. Optional: You may want to compare this to what profit would have been in Assignment 1 using the cost function provided here. • Calculate profit in the long run by using the output level you generated in part 5 and cost data in part 3 and assuming that the selling environment will likely be very competitive. Determine why this would be a valid assumption. • You can also review the section “Key Statistics” on p. 38 of the IBISWorld Industry Report Report. Question 7 Instructions Recommend two (2) actions that the company could take in order to improve its profitability and deliver more value to its stakeholders. Outline, in brief, a plan to implement your recommendations. • Review the sections “Industry Performance” and “Products and Markets” in the IBISWorld report. Frozen Food Production in the USNovember 2013   1 WWW.IBISWORLD.COM Keeping cool: Revenue will grow marginally as producers focus on convenience and health IBISWorld Industry Report 31141 Frozen Food Production in the US November 2013 Hester Jeon 2 About this Industry 17 International Trade 34 Revenue Volatility 2 Industry Definition 19 Business Locations 35 Regulation & Policy 2 Main Activities 2 Similar Industries 21 Competitive Landscape 3 Additional Resources 21 Market Share Concentration 38 Key Statistics 21 Key Success Factors 38 Industry Data 4 Industry at a Glance 22 Cost Structure Benchmarks 38 Annual Change 24 Basis of Competition 38 Key Ratios 5 Industry Performance 25 Barriers to Entry 5 Executive Summary 26 Industry Globalization 5 Key External Drivers 7 Current Performance 27 Major Companies 9 Industry Outlook 27 Nestle SA 11 Industry Life Cycle 36 Industry Assistance 39 Jargon & Glossary 28 The Schwan Food Company 29 ConAgra Foods Inc. 13 Products & Markets 30 H.J. Heinz Company 13 Supply Chain 14 Products & Services 33 Operating Conditions 15 Demand Determinants 33 Capital Intensity 16 Major Markets 34 Technology & Systems www.ibisworld.com | 1-800-330-3772 | info @ibisworld.com Frozen Food Production in the USNovember 2013   2 WWW.IBISWORLD.COM About this Industry Industry Definition This industry includes companies that produce frozen fruits, vegetables and juices; frozen entrees and side dishes (excluding seafood); frozen pizza; frozen whipped Main Activities The primary activities of this industry are toppings; and frozen waffles, pancakes and French toast. These products are then distributed to grocery wholesalers, retail food stores and the hospitality industry. Producing frozen fruit and vegetables Producing frozen fruit and vegetable juice Producing frozen meals, pizza and whipped toppings Producing frozen waffles, pancakes and french toast The major products and services in this industry are Frozen breakfast Frozen vegetables and fruits Prepared food Other Similar Industries 31122 Margarine & Cooking Oil Processing in the US These establishments are primarily engaged in wet milling corn and vegetables; crushing oilseeds and tree nuts; refining and blending vegetable oils; and manufacturing shortening and margarine. 31142 Canned Fruit & Vegetable Processing in the US These establishments primarily manufacture canned, pickled, and dried fruits, vegetables and specialty foods. 31152 Ice Cream Production in the US Establishments in this industry are primarily engaged in manufacturing ice cream, frozen yogurts, frozen ices, sherbets, frozen tofu and other frozen desserts. 31161 Meat, Beef & Poultry Processing in the US These establishments are primarily engaged in slaughtering animals and preparing processed meats and meat byproducts, such as manufacturing frozen specialty foods containing meat, like frozen dinners. 31194 Seasoning, Sauce and Condiment Production in the US These establishments primarily manufacture dressings and sauces; spices, table salt, seasoning, flavoring extracts and natural food colorings; and dry mix food preparations. 31199 Baking Mix & Prepared Food Production in the US These establishments primarily manufacture food, including mixing purchased dried or dehydrated ingredients for soup mixes and bouillon. Frozen Food Production in the USNovember 2013   3 WWW.IBISWORLD.COM About this Industry Additional Resources For additional information on this industry www.affi.com American Frozen Food Institute www.nfraweb.org National Frozen and Refrigerated Foods Association www.usda.gov US Department of Agriculture IBISWorld writes over 700 US industry reports, which are updated up to four times a year. To see all reports, go towww.ibisworld.com WWW.IBISWORLD.COM Frozen Food Production in the US November 2013   4 Industry at a Glance Frozen Food Production in 2013 Key Statistics Snapshot Revenue Annual Growth 08-13 Annual Growth 13-18 Profit Exports Businesses $28.4bn 2.6% $1.4bn $2.0bn Demand from frozen food wholesaling Revenue vs. employment growth Market Share 6 The Schwan Food Company 9.1% 6 4 3 2 H.J. Heinz Company 5.7% % change 9 % change Nestle SA 18.6% ConAgra Foods Inc. 7  .4% 0 −3 −6 Year 05 0.4% 523 0 −2 07 09 Revenue 11 13 15 17 19 −4 Year 07 09 11 13 15 17 19 Employment SOURCE: WWW.IBISWORLD.COM p. 27 Products and services segmentation (2013) 6.0% Key External Drivers 7.4% Demand from frozen food wholesaling Other Frozen breakfast Agricultural price index External competition for the Frozen Food Production industry Per capita disposable income 56.0% 30.6% Prepared food Frozen vegetables and fruits Time spent on leisure and sports Trade-weighted index Per capita fruit and vegetable consumption p. 5 SOURCE: WWW.IBISWORLD.COM SOURCE: WWW.IBISWORLD.COM Industry Structure Life Cycle Stage Mature Regulation Level Heavy Revenue Volatility Medium Technology Change Medium Capital Intensity Medium Barriers to Entry Medium Industry Assistance Medium Industry Globalization Medium Concentration Level Medium Competition Level Medium FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 38 Frozen Food Production in the USNovember 2013   5 WWW.IBISWORLD.COM Industry Performance Executive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage Executive Summary The Frozen Food Production industry benefited from lower disposable income levels during the recession as consumers opted for affordable frozen food products at supermarkets and grocery stores. Industry revenue spiked in 2009, but sales declined as the economy and disposable income levels recovered. With more money to spend, consumers purchased more fresh produce over frozen varieties and dined out more frequently. Additionally, growing health concerns caused many consumers to purchase less frozen Product innovation will benefit firms, but demand for fresh foods will limit growth prepared meals, which are often perceived to be unhealthful. Operators responded by introducing products with healthier, more nutritious ingredients. As a result of product innovation, revenue is anticipated to grow an annualized 2.6% to $28.4 billion over the five years to 2013, including an increase of 2.0% in 2013. Despite revenue growth in the past five years, industry profit suffered primarily due to rising commodity prices. Marketing costs also dampened profit margins as leading producers aggressively introduced new products to Key External Drivers Demand from frozen food wholesaling Wholesalers buy frozen foods from manufacturers and resell these products to retailers, such as supermarkets and grocery stores, where consumers purchase industry products. As consumers demand more frozen foods from retailers, retailers and wholesalers buy more products from industry operators, which boosts revenue. Demand from frozen food gain market share. Further complicating the matter, many producers were unable to pass on the rising cost of inputs to downstream markets due to consumers’ sensitivity to prices during the recession. Consequently, profit fell from 6.1% of revenue in 2008 to 5.1% in 2013. As profit margins eroded, many producers laid off some of their employees and relied more on machinery and equipment. Additionally, larger companies like ConAgra found acquisitions especially attractive due to the cost savings that could be achieved from economies of scale. Over the next five years, operators will continue to develop new products that appeal to health-conscious consumers and invest in marketing campaigns to boost the image of frozen foods. As more Americans return to work and have less time to prepare meals from scratch, they will opt for the convenience of frozen meals. However, consumers are expected to purchase more fresh produce as disposable income levels continue to rise. Rising income will also allow consumers to dine out at restaurants more frequently. Finally, the growing popularity of imported frozen food products is anticipated to dampen demand from US producers. Ultimately, revenue is expected to rise an annualized 0.4% to $28.9 billion in the five years to 2018. wholesaling is expected to decrease in 2014, representing a potential threat to the industry. Agricultural price index Raw inputs such as fruits, vegetables, grains, processed meat, oils, sugar and other commodities make up the primary cost components for frozen food producers. When the cost of these inputs rises, profit becomes tight. Producers Frozen Food Production in the USNovember 2013   6 WWW.IBISWORLD.COM Industry Performance have the option to pass on rising costs in the form of higher prices to downstream buyers, but operators risk lowering demand. The agricultural price index is expected to increase throughout 2014. External competition for the Frozen Food Production industry Frozen foods are typically easier to prepare than their fresh counterparts. However, consumers may prefer fresh produce and fresh meat over frozen alternatives due to their taste and the perceived health benefits of fresh food. Industry operators also face competition from canned food producers and grocery stores that sell prepared hot food. External competition for the Frozen Food Production industry is expected to increase in 2014. Per capita disposable income While higher per capita disposable income allows consumers to purchase a greater volume of industry goods and trade up to premium products, many consumers also opt for alternative goods, such as fresh produce and fast food. Therefore, as income levels rise, demand for frozen food falls as competitive products become more popular. In 2014, per capita disposable income is expected to rise. Time spent on leisure and sports One of the primary benefits of frozen prepared meals is that they are convenient and save people time. As consumers become busier and have less time to spend on leisure activities, demand for convenient products like frozen meals grows. Time spent on leisure and sports is expected to decline in 2014, representing an opportunity for industry operators. Trade-weighted index The industry derives a growing proportion of its revenue from exports, which are sensitive to fluctuations in exchange rates. When the value of the dollar falls, domestic goods become relatively less expensive in the global market, boosting industry exports. The trade-weighted index is expected to increase in 2014. Per capita fruit and vegetable consumption Consumers’ eating habits change as their understanding of healthy living evolves. Recent studies show that certain frozen foods provide the same nutritional content as fresh ones. Therefore, an increase in fruit and vegetable consumption benefits the industry. Per capita fruit and vegetable consumption is expected to decrease slowly in 2014. Per capita disposable income Demand from frozen food wholesaling 6 4 4 2 2 % change % change Key External Drivers continued 0 −2 −2 −4 Year 0 07 09 11 13 15 17 19 −4 Year 06 08 10 12 14 16 18 SOURCE: WWW.IBISWORLD.COM Frozen Food Production in the USNovember 2013   7 WWW.IBISWORLD.COM Industry Performance Healthy products fight falling demand The Frozen Food Production industry has performed well over the past five years, particularly during the recession, when consumers turned to the frozen aisle of grocery stores for cost savings. As per capita disposable income levels eroded in 2009, Americans cut back on dining out at restaurants and sought ways to trim their grocery bills. Consequently, more consumers began to eat at home, pack lunch and purchase more affordable products at groce ...
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mwalimumusah
School: University of Maryland

Attached.

Running Head: OPERATIONS DECISION

Operations Decision
Student’s name
Institutional Affiliation

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OPERATIONS DECISION

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Operations Decision
Question #1
While the information provided does not expressly show the structure in which the firm
exists, it is highly likely that it is an oligopoly structure, where there are chances that it is in a
duopolistic setting. In such a landscape, the market features a limited number of sellers but
highly numbers of buyers, but still, other factors make it difficult to determine its specific
organization (Jullien & Pavan, 2014). However, an in-depth examination of the figures provided
by the previous assignment reveals some different findings. The most basic information that has
emerged is that the firm now has a substantial control over the market and cannot set prices
without facing a significant loss of the market. Further, the computations showed that the firm
has a CPED of 0.68. Impliedly, the products are substitutes, but the firm's sales are not notably
affected by any shifts in the prices of the competitors (Adachi & Matsushima, 2014). For
example, if the competitor decides to raise their prices by around 1%, the current good will
increase by 0.68% in quantity demanded. Probably the product has attracted some considerable
following in the market and any actions perpetrated by the competitors may not trigger visible
changes. The market structure is thus determined by other factors rather than pricing. If it
happens that the market is a duopoly, then an instance of a kinked demand curve may arise,
leading to competitive battles between the two firms that will ultimately see the prices of their
goods falling drastically as they try to broaden their scopes of the market. However, that stage is
yet to be reached as the firms are quite comfortable with the current price and demand levels.
Pricing is the fundamental determinant of the plan for the assessment of the market
effectiveness. In the case of a duopolistic structure, the price-quantity combination plays a

OPERATIONS DECISION

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pivotal role in the determination of the actions that each firm will take in the furtherance of their
profit-making agenda. The individual seller comes up with unique ways of setting their internal
operations due to the somewhat rigid characteristic of the market prices. Under the duopolistic
structure, the rates charged will be dependent upon individual experimentation and consultations.
The particular firm will fix its price after analyzing the underlying factors that may affect the
cost of the ...

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