Introduction

There are countless low calorie microwavable food options in the market today that are available for purchase. As people experience a higher income, they can afford a better lifestyle than was previously accessible; therefore, people’s cooking style has changed. Instead of using traditional cooking methods, people now use microwaves to cook. With this microwave usage rise, a rise in microwavable food items has also occurred. With so many diverse products available it is so very easy to find and purchase a healthy choice of microwavable food. A low-calorie or healthy selection of diet choice is one that includes a good source of protein; in addition to containing a minimum of 3 grams of fiber (to satisfy), and also has no more than 600 milligrams of sodium (Zelman, n.d.).

Some of the manufacturer options are: Lean Cuisine and Healthy Choice. Both of them are major competitors in the frozen food market. Lean Cuisine, a part of Stouffer’s (which dates back to the 1920’s) was acquired by Nestlé 1981 and has since then expanded its market in the US, Canada and Australia. Lean Cuisine offers a wide variety of frozen foods and is one of the top choices for low calorie food (Nestle', n.d.).

Healthy Choice, manufactured by ConAgra, is another principal low calorie frozen food supplier. They are Lean Cuisine’s biggest competitor. The market segment is decided by three criteria which are the variables behavioralistic, psychographic and profile (Company history, n.d.) (Market segmentation, n.d.).

Behavioralistic segmentation variables are those that are pursued from product and buying patterns such as volume of purchase, brand loyalty, readiness to buy and frequency (to name a few) and may be judged to be the primary basis. This variable has the advantage of using variables that are intimately related to the product itself; it is a somewhat direct beginning point for market segmentation (Market segmentation, n.d.)

Psychographic segmentation variables are used when purchasing behavior compares with consumer lifestyle or personality. Consumers who hold diverse personality and lifestyle trends also become biased towards particular products. Their economic and social standing determine their choices (Market segmentation, n.d.).

Profiling is not the most important gauge for market segmentation. Upon determining the differences in the markets, it also must be decided what channel through which these are exhibited. Profile variables like socio-economic group or physical locations are extremely essential in choosing the target audience (Market segmentation, n.d.).

In deciding the market structure for the food industry, first one would have to keep in mind their target audience. It is vital to do a strong study of the economic growth of the entire food industry. Additionally, there is a necessity to be a motive and purpose for growth amongst the company itself (tech4t, n.d.).

To determine the scale of operation one has to know whether the firm is going to supply the local, national or global market (McGuigan, et al., 2014).

Economic study of the industry

The growth of the food industry in the United States is also determined by the one percent population growth of the nation. The food industry is also associated with the population; therefore, an increase in population is sure to impact sales in the food industry. When the scope of market for frozen food is determined, it can also be related to the sale of microwaves. Microwave sales are directly linked to the rise in per capita income and also in the rise in the increase of the working class people. Healthier food options are therefore also related to the health-conscious customer.

Consumer Behavior

Consumer behavior is dependent upon the gender, age, educational, social and economic background of the people. When we have a look at the consumer behavior of the food industry we should first study the target consumers. Our target would be on the buying and purchasing power of the consumer. Our sales would also be determined on the sale of microwave ovens.

The more microwave oven users there are, the more the demand for frozen foods will be. The consumer’s taste and educational background also affects sales. Since consumer awareness is a result of educational awareness about healthy eating habits, it is necessary for consumers to realize the potential consumers and work to provide them with the products they want.

Analyzing effectiveness of the market structure

The effectiveness of our market structure is dependent upon our increase in demand and thereby the sales revenue generated through them. The demand for the low-calorie microwavable food is inelastic in nature; which implies that an increase in the price of the food leads to the fall of the quantity demanded by less than proportionate amount. The income elasticity of the products is flexible and therefore we can say that it is a luxury good. Thus advertisement policy also has an essential role to play on the impact of the sales of the product (Nicholson, 2011).

Cross Elasticity

Cross Elasticity explains that if the demand for substitute goods will constantly be positive, for the reason that the demand for one good will increase if the price for the other good increases. Like, if the price of fresh vegetables increases however all other market conditions remain the same, the quantity demanded for frozen, which is a substitute for fresh food will increase as consumers switch to an alternative (www.investopedia.com).

Determining Change Factors

If the cost of microwaves is reduced, then more consumers will demand frozen foods. Therefore, the cost of relative products also plays an important role in the market structure of goods. Additionally, there are some products which act as substitute; the rise in price of a product, and other conditions remaining constant also has an impact on the demand for substitute products. For instance, we can use the example of fresh vegetables, if the cost of fresh vegetables goes up, people will automatically switch to ready-to-eat frozen food because it is more cost effective to buy, in addition to being easy to cook (AmosWEB, n.d.).

Long Run and Short Run Cost of Production Analysis

Cost of Production is the cost that an organization incurs on manufacturing a product. Production costs include raw material costs as well as the cost of labor. It includes long run as well as the short term expenses incurred. Long run costs have no fixed factors of production, while short run costs have fixed factors and variables that impact production. Efficient long run costs are persistent after the combination of outputs with the purpose of a firm producing results in the preferred extent of the goods at the lowest possible cost (McGuigan, 2014).

Long run production cost for low calorie microwavable food includes the cost of machinery and land for setting up the manufacturing unit. The short term cost of production includes the variable costs and the costs that are only incurred for a short period of time (McGuigan, 2014).

Short terms costs include the costs are based on a depiction of the medium-term stably-acting macroeconomic variables that affect food prices, as well as knowledge of their intensity and the timing of their transmission. This analysis is formalized by a partial single-equation model of food price inflation, and the model approach is further supplemented and established by means of other information and expert judgment. Short term cost includes taxes and other expenses that are variable or incurred once or short term. Any expense incurred towards advertising the product is short term cost (Czech National Bank, 2004) (McGuigan, 2014).

Business Discontinuation

A business which is unsuccessful and isn’t generating enough revenue to carry out its business operations is very likely to be discontinued. When there is less demand for products than there is less revenue, the company suffers profit losses. The following factors are reasons a business may be discontinued (Mason, 2014):

1. There might not be enough capital to continue doing business

2. If there is no proper inventory management, then the business can be discontinued. To maintain equilibrium between demand and supply, inventory is necessary; however, if that equilibrium is disturbed, this too might lead to a business shut down.

3. If the business expands outside the capacity of management and operations, this can also lead to business discontinuation.

4. If an organization is not able to compete with the existing as well as the new entrants in the market then it might be a cause for its failure (Ames, 1983).

Hence we can say that low sales, competition, lack of managerial ability and financial crisis might be the main reasons for the business to shut down (Khan Academy, n.e.).

Pricing policy maximizes profits

An essential component for staying in the market is pricing. Though there is no singular method of accuracy to determine pricing strategy, there are some aspects such as the cost of production, product demand, market position and competition that help determine the prices (McGuigan J. M., 2014).

In order to maximize profits these organizations should focus on optimum pricing. An optimum price by definition is the price at which the consumer is willing to purchase the product. Competitive pricing is also done by keeping in view the prices of similar organizations in the market (Basu, n.d.).

The demand for low-calorie microwavable food is inelastic in nature; therefore, we can draw the conclusion that a price increase in food prices leads to the decrease of quantity demanded by less than proportionate amounts. Subsequently this commodity is considered a luxury good so its advertising elasticity also influences its sales. The organization should follow the pricing recognized after analyzing the production costs and competitors’ market prices.

Organizational goals regarding profit maximization are also to be considered while determining the optimum plan for pricing.

Financial Performance Evaluation

Evaluating the financial performance of a company means having subjective measure of how well a firm makes use of its assets from its primary mode of business as well as generates revenues. This expression is also used as a general evaluation of a firm's overall financial health over a given period of time, and can be used to compare related firms across the same industry or to compare industries or sectors in aggregation. While evaluating financial performance for our companies we can take help of the financial ratios as well (eHow, n.d.).

Barron states that the performance of a business enterprise is influenced by its strategies and operations in market and non-market environments (Baron, 2000).

Financial ratios are an important element in determining the performance of an organization. Financial ratios should be analyzed by a professional accountant. In order to keep a record of the company’s financial health, ratio analysis is used as a tool. Ratio analysis determines and interprets how efficiently a company is working in terms of its finances. Ratio analysis presents a simple and comprehensible understanding of the accounting variables. It is an effective tool for understanding a business’s success in terms of financial undertaking and performance (Reference for Business Encyclopedia of Business, n.d.).

Financial analysis is an accounting tool that can be used internally as well as externally. Some reasons for internal ratio analysis are to measure the worker’s performances, company efficiency of operations in addition to credit policies are also some reasons for internal ratio analysis; on the other hand, credible external creditors, investors and borrowers perform ratio analysis to ascertain and understand the company’s credit worthiness, investment returns and their financial standing (Reference for Business Encyclopedia of Business, n.d.).

Analysts carry out financial analysis using data provided by the company itself such as the company’s financial disclosures and their financial and economic data using external sources as well.

Ratio analysis is illustrated by Myers as “Ratio analysis is the study of relationships among various financial factors in business” (Myers, 1962)

There are many kinds of ratios which are classified according to their method of computation in addition to their characteristics. Generally, ratios can be characterized as quotients that reflect position of the company to face their obligation. There are those that mirror the relationship between net profits and expenditures, the ratios describing relation between gross benefits and expenses and lastly the ones that reflect the component of one variable to other. One could name these ratios as coverage ratios, return ratios, turnovers ratios and component percentages (Reference for Business Encyclopedia of Business, n.d.)

Types of ratios follow below:

1. Activity ratios

2. Financial leverage ratio

3. Financial structure or solvency ratios

4. Liquidity ratios

5. Profitability ratios; and,

6. Shareholders ratios

Therefore, it can be concluded that through ratio analysis we can evaluate the financial performance of the organization. It is very important for financial data to be correct so that the computation and analysis of data is accurate. The choice of ratio depends on the kind of organization and the kind of information we have.

“In conclusion, financial analysis can be an important tool for small business owners and managers to measure their progress toward reaching company goals, as well as toward competing with larger companies within an industry. When performed regularly over time, financial analysis can also help small businesses recognize and adapt to trends affecting their operations. It is also important for small business owners to understand and use financial analysis because it provides one of the main measures of a company's success from the perspective of bankers, investors, and outside analysts” (Reference for Business Encyclopedia of Business, n.d.).

References

Ames, M. D. (1983). Small Business Management. West Publishing Co.

AmosWEB. (n.d.). Oligopoly. Retrieved from AmosWEB Encyclonomic WEB pedia Web site: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=oligopoly

Baron, D. P. (2000). Business and its environment 3rd Edition. NJ: Prentice Hall.

Basu, C. (n.d.). Price elasticity & optimal pricing policy. Retrieved from Houston Chronicle Web site: http://smallbusiness.chron.com/price-elasticity-optimal-pricing-policy-36020.html

BusinessDictionary.com. (2014). Elasticity of demand. Retrieved from BusinessDictionary.com Web site: http://www.businessdictionary.com/definition/elasticity-of-demand.html#ixzz2qPBSYSAI

Company history. (n.d.). Retrieved from ConAgra Foods Web site: http://www.conagrafoods.com/our-company/company-history

Czech National Bank. (2004, January n.d.). Short-run food price prediction methods. Retrieved from Czech National Bank Web site: http://www.cnb.cz/en/monetary_policy/inflation_reports/2004/2004_january/boxes_annexes/zpinflace_04_january_b.html

eHow. (n.d.). How to prepare relevant information for a financial performance evaluation. Retrieved from eHow Web site: http://www.ehow.com/how_6789532_prepare-information-financial-performance-evaluation.html

Khan Academy. (n.e.). Oligopolies and monopolistic competition. Retrieved from KhanAcademy Web site: http://www.khanacademy.org/economics-finance-domain/microeconomics/perfect-competition-topic/monopolistic-competition-oligop/v/oligopolies-and-monopolisitc-competition

Market segmentation. (n.d.). Retrieved from NetMBA Business Knowledge Center Web site: http://www.netmba.com/marketing/market/segmentation/

Mason, M. (2014). What causes small businesses to fail. Retrieved from Moyak Web site: http://www.moyak.com/papers/small-business-failure.html

McGuigan, J. M. (2014). Pricing techniques and analysis. In J. M. McGuigan, Managerial economics: Applications, strategies and tactics (p. 500:531). Mason: Cengage Learning.

McGuigan, J. R. (2014). Production economics. In J. R. McGuigan, Managerial economics: Applications, strategies and tactics (13 ed.) (p. 234:264). Mason: Cengage Learning.

McGuigan, J. M. (2014). Applications of cost theory. In J. M. McGuigan, Managerial economics: Applications, strategies and tactics (13th ed.) (p. 311:314). Mason: Cengage Learning.

Myers, J. (1962). Reporting of leases in financial statements (accounting research study). American Institute of CPAs.

Nestle'. (n.d.). FAQs. Retrieved from Lean Cuisine Web site: http://www.leancuisine.com/index/FAQ.aspx

Nicholson, W. &. (2011). Microeconomic theory: Basic principles and extensions. (11th ed.). USA: Cengage Learning.

Reference for Business Encyclopedia of Business. (n.d.). Financial analysis. Retrieved from Reference for Business Encyclopedia of Business (2nd. ed.): http://www.referenceforbusiness.com/small/Eq-Inc/Financial-Analysis.html

tech4t. (n.d.). Customer profiling and segmentation. Retrieved from Tech4t.co.uk Web site: http://www.tech4t.co.uk/2013/05/customer-profiling-and-segmentation/

www.investopedia.com. (n.d.). Cross Elasticity of Demand.

Zelman, K. (n.d.). Healthy frozen dinners: 20 Picks: How to choose healthy frozen dinners. Retrieved from WebMD Web site: http://www.webmd.com/diet/features/top-12-healthy-frozen-dinners?page=3

1. Compute the elasticities for each independent variable. Note: Write down all of your calculations.

When P = 500, C = 600, I = 5500, A = 10000 and M = 5000, using regression equation,

QD = -5200 - 42*500 + 20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000 = 17650

Price elasticity = (P/Q)*(dQ/dP)

From regression equation, dQ/dP = -42.

So, price elasticity EP= (P/Q) * (-42) = (-42) * (500 / 17650) = -1.19

Likewise,

EC = 20 * 600 / 17650 = 0.68

EI = 5.2 * 5500 / 17650 = 1.62

EA = 0.20 * 10000 / 17650 = 0.11

EM = 0.25 * 5000 / 17650 = 0.07

2. Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results.

Price elasticity is -1.19. This indicates a 1% increase in the price of the product, which makes the quantity demanded to drop by 1.19%. Therefore, the demand of this product is somewhat elastic. Consequently, increase in price may drive customers away.

Cross-price elasticity is 0.68. If the price of a competitor’s product goes up by 1%, then quantity demanded of this product will increase by 0.68%. This product is fairly inelastic to a competitor’s price and there is no need to be concerned about the competitor since their pricing won’t affect sales.

Income-elasticity is 1.62. This indicates that a 1% rise in the average area income will boost the quantity demanded by 1.62%. In this aspect, the product is elastic and the company can make the decision to raise the price if the average income rises.

Advertisement elasticity is 0.11which means that a 1% increase in advertising expenses will raise the quantity demanded by only 0.11%. Therefore, demand is rather inelastic to advertising. For that reason, more advertisement doesn’t automatically mean that a company can raise the price because that still could drive customers away.

With respect to microwave ovens in the area, elasticity is 0.07, which shows an elevation of 1% in the number of ovens in the area increasing the quantity demanded by a mere 0.07%. Therefore, in this aspect, demand is inelastic and the pricing strategy can simply skip this element.

Consequently, quantity demanded (as we have seen above) is sensitive to the price of product and the income of people but somewhat insensitive to our competitor’s price and almost completely insensitive to advertising and the amount of microwaves existing in area.

3. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.

A cut in price would raise the quantity demanded since the price elasticity is negative. Additionally, the elasticity is a little over unity. Revenue is maximized when the degree of elasticity is one. With that in mind, a price reduction will raise the quantity demanded and will lead to a net gain in sales as elasticity moves towards unity. In my opinion, the firm should decrease the price just as it would increase the market share and the revenue generated.

4. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 cents. A. Plot the demand curve for the firm.

With all other factors constant, the demand equation is as follows:

Q = -5200 - 42*P + 20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000

Q = 38650 - 42P

P = 38650/42 - Q/42 (plotted below)

B. Plot the corresponding supply curve on the same graph using the supply function Q = 5200 + 45P with the same prices.

Q = 5200 + 45P

P = -5200/45 + Q/45

C. Determine the equilibrium price and quantity.

Solving the demand and supply equation concurrently,

38650 - 42P = 5200 + 45P

87P = 33450

P = 384.48

and Q = 5200 + 45*384.48 = 22501

Therefore, the equilibrium price is 384 cents and the equilibrium quantity is 22,501 units. Additionally, the equilibrium price and the quantity can be seen on the graph indicated at the point where the supply and demand curve meet.

4. Outline the significant factors that could cause changes in supply and demand for the product. Determine the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product.

As is pointed out in the demand equation, demand of the low-calorie food can change if there is a change in consumer income, the pricing of a competitor product and the price of correlating goods (microwave oven). This change can also happen as a result of change in consumer preference (e.g. consciousness towards low-calorie food). Supply of the product can change if there is a change in the number of product suppliers, production technological advances in addition to other elements like labor and raw-material availability change, which directly affect production costs.

5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves.

An increase in consumer income, a price cut in the price of a complementary product (e.g., microwave ovens) could cause a rightward shift of demand curve product; as could a population increase or increased preference for the product (e.g., awareness towards low-calorie food). A decrease in consumer income or a recession (like the U.S. has been experiencing) can cause a leftward shift of demand curve; additionally, an increase in price of a complementary product (microwave oven etc.) could cause the same leftward shift of demand curve.

Technology advances in food processing, increased availability of cheap labor and raw materials, increased tax-cuts and government subsidies (among other things) can cause a rightward shift of supply curve. A leftward shift can be caused by a decrease in availability or an increase in price of labor and raw materials, increased taxes, etc.

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