Week 6 Assignment 2

Operations Decision
By
Earnest Lee Sims

To

Dr. Guerman

Eco 550

November 16, 2014

Assignment 2: Operations Decision

Eco 550
The purpose of this paper is to present the low-calorie microwaveable foods in support of the
companys long run operations decision plans. In the paper, I will examining the results of the
new supply curve as it reflects to the current market structure and then take into account the
expected changes to the selling environment and factors that may have caused the change. I will
also examine chief short-run and long-run production and cost functions as applied to this new
cost data to determine if there are conditions under which operations could be discontinued.
Given the change in the market structure they we be a need to review the pricing structure so as
to maximize profits. Finally, I will proposes two (2) course of actions that the company should
take to increase profitability and maximize shareholders value.
1. The effectiveness of the market structure the company is operating.
Every company in a pure competitive market is a price taker; the equilibrium price and industry
output are is a direct result of demand and supply. The market for low-calorie microwavable
food shows how demand and supply in the market for low calorie foods, produced under
conditions of perfect competition, determine the total output and price consumers are willing to
pay. The equilibrium price is 407.65 cents; the equilibrium quantity is 24,335.
QD = 65,100 -100P
Qs = -7909.89 +79.0989P.
Firm operating in a pure competitive selling environment has no direct say on what the firm
charges on its product, however, the firm can control the quantity supply to the market.
According to Slack & Lewis, success or failure depends in a pure competitive market lies in how
a company controls production cost and portrays its brand (2008). In pick out the capacity of

output, one significant concern is the income the firm will gain by manufacturing the products.
The organization must develop ways of carrying out operations to ensure maximum revenue and
increase productivity in the long run. According to Routledge, a good strategy is crucial in
defining the effectiveness of the market structure in which the firm functions (2008). Bragg also
reiterated by stating that a good market strategy will mostly emphasis on the products available
for sale, the total number of companies participating, trends in pricing and important techniques
of product promotion (2012).
2. Changes to market structure and reasons that have caused changes from the market structure
specified in Assignment 1.
Recent market surveys confirmed changes to the market structure from a perfectly competitive
market to an imperfectly market structure. Imperfectly competitive market structures are markets
where firms have the power to influence or determine price. A physical count of competing firms
in the market revealed that they are now only fifteen companies directly compete for the market
share of the low-calorie microwavable foods, of the fifteen on three companies control seventy
five percent of the market share. Based on sells, our company is ranked as number two with a
twenty-seven percent of sales of low-calorie microwavable dinners. The percentage market share
represent the market concentration ratio. Beck, Demirguc-Kunt, and Levine (2003) defined
concentration ratio as a measures of the collective market share the top number firms possesses
in an industry.
Given the above mentioned information, it is safe to conclude that we are now operating in an
oligopolistic market structure. An oligopoly selling environment is a competitive market
structure with moderately small numbers of businesses offering comparable products or services

(McGuigan, Moyer & Harris, 2014). The key cause of the market structure as pointed out by
Slack & Lewis are withdrawal of a competitor and a major increase or decrease in the price of
products (2003). The above changes influence business operations in various ways. For instance,
there will be increased output since the market share increases resulting in an increase to cost of
operations, with notable increases affecting elements such as labor, and advertisement costs. It is
probable that labor costs will decrease in the long run as the firms control of new companies is
solidified and redundant positions are deleted. The above changes may also require the company
to upgrade its operations and embrace the use of modern technology in its operations (Bragg,
2012).
3. Short and long-run production and cost functions for the frozen, low-calorie microwaveable
food company.
TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100 + 0.0126424Q
From assignment 1 QD = 350,000 -100 P
QS = -7909.89 + 79.0989P
ATC = TC/Q
= (160,000,000/Q) + (100Q + 0.0063212Q2)/Q
= (160,000,000/Q) + 100 + 0.0063212Q
AFC = 160, 000, 000/Q
AVC = 100 + 0.0063212Q
To find the level of output that would minimize the average total cost, we have to equate the
average total cost to marginal cost.

ATC = MC
(160,000,000/Q) + 100 + 0.0063212Q = 100 + 0.0126424Q
160,000,000/Q = 0.0063212Q
160,000,000 = 0.0063212Q2
159,096.35 = Q
Therefore, the value of Q which is 159,096.35 represent the output level that minimize the
average total cost. In the short run, if production=n level equals 159,096.36 then we would be
producing at our optimal average total cost.
To find out how much it will cost to produce at our minimum average total cost:ATC = (160,000,000/Q) + 100 + 0.0063212Q
= (160,000,000/159,096.35) + 100 + 0.0063212(159,096.35)
= 1,005.68 + 100 + 1,005.68
= 2,111.36 = $21.11
This gives us our per-unit cost of production when we are at our most efficient level. In the long
run if the selling environment changes and becomes competitive we will be forced to produce at
our minimum total average cost.
4. Circumstances under which a firm should cease operations.
The graph below demonstrations the correlation between average total cost (ATC), average
variable cost (AVC), and marginal costs (MC). The MC curve intersects the ATC and AVC
curves at their lowest points. Consequently, when MC is below an AVC, average cost is
declining, and when MC is above average cost, average cost is rising. MC is the cost of
manufacturing the last unit of output. MC curve increases with the quantity of output and the MC
curve crosses both the ATC and AVC curves from below at their minimum points and moves

above. The shape of the MC curve branches from the Law of Diminishing Returns. Diminishing
returns in the most rudimentary sense arises when marginal product cascades as a growing
amount of a variable similar input is applied to a fixed input (Blaug, 1985).
The shutdown point is the point where minimum average variable cost (AVC) intersect the
marginal cost (MC). If the price falls below the minimum point b in the graph, then we should
shut down. This means that the company can circumvent making further losses by suspending
operations. In the long run the company should close its operations if its making economic
losses -- unless changes could be implemented that can allow the firm to adjust its scale and curb
those losses (Scotchmer 1991). This might be achieved by shifting production to a different
SRATC curve via a different capital choice.
The breakeven point is a point where marginal cost intersect the average total cost. However, if
the market price fall below $21.11, depicted by point C in the graph, and above point be we have
to continue operations in the short run. This is because prices at least covers our variable cost and
some of the fixed cost. However, in the long run under competitive environment, the company
have to exist the industry. As reiterated by Stokes, management have to play an active in dealing
with the market conditions, placing market research personnel and being on the frontline dealing
with market prices (Stokes, 2008).
5. The pricing policy that will allow frozen, low-calorie microwavable food company to
capitalize on profits.
For profit maximization, I propose the use of the cost profit maximization rule where marginal
revenue is equated to marginal costs. This is a process whereby the company determines the best
output and price levels in order to maximize its return (Scotchmer, 1991). The point depicted by

quantity q*is where the MR and MC curves converge. The price that correspond to quantity is
then found by extending q* up to the demand curve to get p*. No any other price will work
because a higher price will shrink sales below q*, and a lower price will rise sales above q*.
Given the demand function of, QD = 350,000 -100 P, we need to find the Inverse Demand
function: - 100P = 350,000 - Q
P= (350,000/100) - Q/100
= 3,500 - 0.01Q
Total Revenue (TR) = P*Q
= (3,500 0.01Q)*Q
= 3,500Q 0.01 Q2
MR = TR/Q
= 3500-0.02Q
Therefore, to maximize earnings marginal revenue have to be equated to marginal cost.
MR = MC
3,500 - 0.02 Q = 100 + 0.0126424 Q
3,400 = 0.0326424Q
104,159.01 = Q
Q represent the profit maximizing output which is well below the output at the minimum average
total output.
To get the price that we can charge at this output to maximize our profit, we substitute the
quantity in the profit equation the:P = 3,500 - 0.01Q
= 3,500 - 0.01Q (104,159.01)

= 2,458.41 = $ 24.58
6. To evaluate its financial performance.
From the calculation above, the production combination of 104,159.01units and selling price of
$24.58 per unit puts us at the top of our profit function. Because we have some market power,
this combination puts us in the elastic part of the demand curve. Any price hikes will result in
market share loss and price reduction results higher profit realization.
To evaluate our current financial performance at a production quantity of 104,159.01 units
ATC = (160,000,000/Q) + 100 + 0.0063212Q
160,000,000/104,159.01+ 100+ 0.0063212(104,159.01)
2,294.52 = $22.95
We are selling are products at $24.58 yet it cost us $22.95 to produce giving us a profit of $1.63
per unit. This is an economic profit.
Our short run profit would be T R - TC
TR = P * Q
$24.58 * 104,159.01
$2,560,228.47
TC = ATC * Q
$22.95 * 104,159.01
$2,390,449.28
Profit = $2,560,228.47 - $2,390,449.28
$169,779.19
7. Two (2) ways the firm can improve profitability and deliver more value to its stakeholders.
The biggest costs to the company have included fuel (always climbing), energy and raw
materials. While the company has expanded its business through product innovation, its fixed

and variable continue to climb. The company needs to look at ways to reduce its fuel costs and
well as its costs of raw materials and its packaging costs. To reduce fuel costs it needs to consider
a directed dispatch system and organized routes based on scheduled commercial sales and orders
made online by individual consumers. They may want to look at additional distribution channels
outside of their system. As they already handle orders by individual consumers, they need to
consider moving into direct-to-consumer sales possible as fund raiser for schools, day cares, and
other such organizations. They also need to consider methods of reducing their packing related
costs whether it be conversion to cryogenic freezing or better packing methods. It may also help
if the company develops and presents food materials on a rotational basis to keep people
interested in their products. The company needs to involve its employees in identifying reducible
costs and methods of doing so.
References
Beck, T., A. Demirguc-Kunt, and R. Levine. 2003. Bank Concentration and Crises. NBER
Working Paper no. 9921, August.
Blaug, M., (1985). Economic Theory in Retrospect, 4th edition. Cambridge: Cambridge
University Press,
Bragg, M. S., (2012). Financial Analysis: A Controller's Guide. (2nd Ed.). John Wiley & Sons.
McGuigan, J., Moyer, R. & Harris, F. (2014). Managerial Economics: Applications, Strategies,
and Tactics (13th Ed.). Cengage Learning. Mason, Ohio.
Routledge. S., D. (2008). Principles and Practice of Variable Pressure/Environmental Scanning
Electron Microscopy. John Wiley and Sons

Scotchmer, S. (1991), Standing on the Shoulders of Giants: Cumulative Research and the Patent
Law, Journal of Economic Perspectives, 5.
Slack, N. & Lewis, M. (2003). Operations Management: Critical Perspectives on Business and
Management.