Long-Term Investment Decisions

Long-Term Investment Decisions

ECO 550 Managerial Economics and Globalization

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.

Microwavable frozen meals like Healthy Choice and Lean Cuisine are an easy option and offer easy diet solution for busy people. This is why they are the two leading competitors in the low-calorie frozen, microwavablefood industry. Although they have several similar factors in common such as product type, nutritional value, and price; both Lean Cuisine and Healthy Choice has suffered a drop in sales as the frozen single-serve meal category continues to contract. According to Watrous (2014), ConAgra, who produces HealthyChoice is “aiming to drive more profitable purchases from baby boomers, who represent more than 60% the category’s volume”. She states they are looking to a more effective marketing approach which will include competitive pricing as it will figure largely into their retail strategy.

1. 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.

Nestle who produces Lean Cuisine has also see profits fall from the contraction of the low-calorie frozen, microwavable food industry. They seekimprovement in Lean Cuisine, by offer new products to the line. The Lean Cuisine has already start producing a selling new line extension that are made with all-natural ingredients and no preservatives and Salad Additions (Gelski, 2014).  According to Gelski (2014), since “organic growth was somewhat muted, which reflected lower pricing by their markets, and they leveraged softer input costs to meet the expectations of today’s more value-conscious consumers. This, combined with substantially increased investment behind their brands, delivered stronger volume growth momentum, whilst at the same time they were able to improve the operating margin”.

The low-calorie frozen, microwavable food industry has a monopolistic market structure. This industry is monopolistic because they offer products with unique qualities and they can charge a different price that reflects this uniqueness.

Since this industry is contracting, they should remain competitive by continuously improving their processes and strategic planning. The low-calorie frozen, microwavable food industry can remain competitive by using the product differentiation strategy and competing on their capabilities and endorsements. Lean Cuisine already has an endorsement with Jenny Craig. They can create a product line specifically for Jenny Craig and set their own optimal price for this line. With product differentiation this industry can command a price premium simply because of their product image which is associated with the success of their brand (McGuigan, Moyer, and Harris, 2014, pg. 336)

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.

1. Examine the major effects that government policies have on production and employment. Predict the potential effects that government policies could have on your company.

There are several similarities between a perfect competition market structure and a monopolistic market structure. But the factors that could have caused the change from a perfect competition to a monopolistic competition was there is a higher degree of product differentiation where in a perfect competition all goods are perfect substitutes. The price was also higher than the marginal cost of producing which could allow the suppliers to influence the price and thereby granting them market power.

ATC = TC / Q = 160,000,000 /Q + 100Q + 0.0063212Q2/ Q

1. Another factor that might have caused the change is that with the price being higher than the marginal cost it created barriers for other firms to enter or exit the market. The price of the product amonopolisticcompetition has a few barriers to enter and exit, while a perfect competition has none, allowing a firm to enter or leave an industry freely based on its opinion of the market’s profitability.

= 160,000,000 / Q + 100 + 0.0063212Q

AVC = TVC /Q = 100Q /Q + 0.0063212Q2 /Q

= 100 + 0.0063212Q

Find the minimum ATC, where ATC = MC

160,000,000 / Q + 100 + 0.0063212Q = 100 + 0.0126424Q

– 100 + 0.0063212Q – 100 – 0.0063212Q

Q * 160,000,000 / Q = 0.0063212Q *Q

160,000,000 / 0.0063212 = 0.0063212Q2 /0.0063212

25,311,649.686.77 = Q2

159,096.35 = Q

This is the output the firm must produce that will minimize ATC in the long-run. The short- run is no longer in the competitive environment.

ATC = 160,000,000 / 159,096.35 + 100 + 0.0063212 * 159,096.35

= 1,005.68 + 100 +1,005.68

= 2111.36 cents

= $21.11

As long as the market value stay the same, the firm will stay viable; but if more firms enter into the market the lower the price will fall. If the price fall below $21.11 in the long-run, the firm may have to exit the market. This is the firm’s best output level in the long-run.

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.

The firm should discontinue operations in the short run if the price of production falls below its shutdown point and in the long-run if the price falls below its break-even point. Monopolists will experience short‐run losses whenever average total costs exceed the price that the monopolist can charge at the profit maximizing level of output. If the firms prices falls below its average variable cost, their losses will exceed their minimum total fixed cost.

Because a firm may or may not make a profit in the short run, the firm should set its prices where marginal revenue equals marginal costs. This will allow the firm to earn economic dollars per unit of output (McGuigan, Moyer, and Harris, 2014, pg. 360). Management should continue to find ways to maximize profits. Profit is maximized by producing the quantity of output at which marginal revenue of the last unit produced is equal to its marginal cost.

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.

Q = 350,000 – 100P

Q – Q + 100P = 350,000 – 100P + 100P – Q

100P / 100 = 350,000 – Q / 100

P = 3500 – 0.5748

TR = P * Q = (3500 – 0.5748Q) *Q

P * Q = 3500Q / Q – 0.5748Q2 / Q

MR = 3500 – 0.5748Q

To maximize profit; MR = MC

3500 – 0.5748Q = 100 + 0.0126424Q

3500 – 0.5748Q + 0.5748Q -100 = 100 + 0.0126424Q -100 + 0.5748Q

3400 / 0.5748= 0.5748Q /5748

5915.10 = Q

Competitive pricing will allow low-calorie, frozen microwavable food companies to maximize profits be in this policy the firm can either lower their prices to attract more consumers, match their competitors’ prices or set their prices higher than their competitors and rely on their brand and product loyalty. But setting the price higher will require the firm to create an environment that warrants the premium, such adding something extra that their competitors aren’t offering.

According to Investopedia (n.d.), competitive pricing is used more often by businesses selling similar products, since services can vary from business to business while the attributes of a product remain similar. Competitive pricing is generally used once a price for a product has reached a level of equilibrium, after it has been on the market for a long period of time (Investopedia, n.d.).

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.)

P = 3500 – 0.5748(5915.10)

P = $100.00

ATC = 160,000,000 / 5915.10 + 100 +0.0063212(5915.10)

ATC = 27049.42 + 100 + 37.39

ATC = 27186.81 or $271.81 this is the cost to produce at the output level of 5915.10.

The profit margin in this market structure is higher than in the perfect competition market structure. In the long run if the firm enter into the market, the supply curve will shift to the right and the prices will continue to fall until it reaches zero. To prevent this from happening, the firm need to create some strategic barriers to continue to earn positive economic profits.

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.

The companies in this industry can find ways to reduce their cost by managing them more closely and finding ways to reduce waste. They can start taking a look at their suppliers and assess whether they are getting the best deals, or if it would be better consolidate their supplier base.

The firm can also look at their facilities to see if they are getting all they can financially from their space. And lastly the firm can assess their production to cut waste and lower the costs of their materials.

Another way to improve profitability is by looking carefully at the product that are offered, who you sell it to and at what price to see if improvements can be made. It would be a good idea for the firms to review their prices on a regular basis to see they can make changes based on the marketplace. There may be a possibility that the firm could raise the price without sales risks. By focusing on the more loyal and profitable customers can increase profitability when done properly.

The firm can also expand in other markets by taking on a partner that will complement their business to lessen the risk.

References

Investopedia. (n.d.) Competitive Pricing. Definition of Competitive Pricing. Retrieved on May 15, 2014, from http://www.investopedia.com/terms/c/competitive-pricing.asp.

Gelski, J. (2013 Aug 9) Nestle seeks to fatten up Jenny Craig, Lean Cuisine profits. Retrieved on May 15, 2014, from http://www.foodbusinessnews.net/articles/news_home/Financial-Performance/2013/08/Nestle_seeks_to_fatten_up_Jenn.aspx?ID=%7BD6AD78D0-5F26-40FA-A4D3-163828854B67%7D.

McGuigan, J.R., Moyer, R.C., & Harris, F. (2014). Managerial Economics: Applications, Strategies, and Tactics (13thed.). Pricing and Output Decisions: Strategy and Tactics(pg. 336). Cengage Learning, Mason, OH.

Watrous, M. (2014 Feb 14) ConAgra seeking healthier sales for Healthy Choice. Retrieved on May 15, 2014, from http://www.foodbusinessnews.net/articles/news_home/Business_News/2014/02/ConAgra_seeking_healthier_sale.aspx?ID=%7B28F5670D-F1CB-40B1-8756-383C061EE043%7D&cck=1.