This paper examines the managerial economics of a frozen food firm operating in a competitive market alongside rivals such as Lean Cuisine and Stouffers. It addresses optimal pricing strategy, the risks of stockouts, and the need for flexible pricing in changing markets. The paper calculates short-run and long-run cost functions — including average fixed cost, average variable cost, average total cost, and marginal cost — to assess the firm's financial health. It also identifies conditions under which the firm should discontinue operations and recommends investing in plant automation and renegotiating supplier contracts as key strategies to improve productivity and sustain a competitive market position.
The frozen food industry is a highly competitive one. A number of large firms already hold an enormous share of the overall market. Consider, for example, Lean Cuisine and Stouffers. Lean Cuisine targets a health-conscious market by offering lower-calorie frozen food options and single-serve dinners that appeal to dieters who lack the time to prepare their own meals. Stouffers, by contrast, is a much larger firm that targets a more diverse demographic. It offers its own diet options but also caters to younger consumers and those who enjoy comfort foods without the time to prepare them.
As established in prior analysis, it was recommended that the firm cut its prices in order to increase overall demand. By cutting prices, the firm has the potential to increase its market share. However, the firm must be careful in selecting price points, as cutting prices too drastically would negatively impact the supply available — meaning the firm could sell out too quickly. Stockouts are expensive and can become a serious problem in terms of a firm's ability to capture potential market share. According to the research, "Stockouts negatively impact your organization's revenue and put money in its competitors' pockets" (Dominick, 2012). If the firm prices its products too low, it risks running out of inventory to meet demand, causing potential customers to turn to competitors. This outcome would cost the firm nearly as much as pricing the product too high, which would also drive sales to competitors.
Ultimately, the optimal price for this particular firm would fall between $200 and $300. As illustrated in the accompanying supply and demand curve, this range represents an appropriate price point that would increase demand and market share without risking stockout. Avoiding stockouts is just as crucial as avoiding overpricing. Therefore, pricing the product at approximately $250 to $275 would represent the optimal price point given the firm's strategic goals.
Maintaining similar pricing in the face of changing market conditions requires greater flexibility. As the market environment shifts, the firm needs a strategy that allows it to adjust pricing in response. The research suggests that "a flexible pricing strategy allows a business to quickly adjust pricing as necessary to accommodate a changing business climate or to overcome competitive challenges" (Roltgen, 2013). To take advantage of this approach, the firm must continuously evaluate costs and market factors. This requires ongoing analysis of costs versus demand in order to ensure the set price point remains appropriate at any given time. When the evaluation reveals a need for adjustment, the firm can make the necessary changes to stay ahead of the competition and sustain growing sales.
Several factors could create the need for the firm to adjust its marketing and operating strategies. First and foremost, the entrance of new competitors into the market could require significant strategic adaptation. If a new competitor adopts a much lower pricing strategy, it may force the firm to reduce its own prices beyond what it would otherwise prefer in order to remain competitive. A strong new competitor with greater production capacity could ultimately compel the firm to renegotiate variable costs and the cost of materials in order to keep pace.
Additionally, there is the constant pressure of changing technology. The research suggests that innovations in technology can force a business to change simply to keep up (Joseph, 2014). When a competitor implements newer and more productive technology, it becomes important for the firm to do the same in order to remain relevant. However, rolling out new technology represents a significant short-term investment that can tie up a portion of the firm's free cash. It can also be costly because employees must be retrained, and new hires who are already familiar with the technology may be necessary to ensure a successful implementation. Although these costs can be substantial, they are necessary. A firm cannot afford to allow outdated technology to become a driver of lagging productivity relative to its competitors.
In order to make the most well-informed decisions, it is crucial to analyze both the short- and long-run cost functions. These evaluations use the average fixed cost (AFC), set at 1,175.49; the average variable cost (AVC), set at 186.04; and the average total cost (ATC), set at 1,348. These figures are established when demand is at an optimal level.
For the short-term evaluation, assume the firm will continue operating with a production goal of 6,000 units per month. Each month has an average of 20 working days, accounting for the exclusion of weekends and holidays. This means the firm produces 300 units per day using all 100 of its workers. Worker productivity (WP) is calculated by dividing the number of units produced each day by the number of workers, yielding an average of 3 units per worker per day.
The key cost calculations are as follows:
ATC = TC/Q = (160,000,000)/Q + 100 + 2 × 0.0063212Q = 1,348
AVC = TVC/Q = 186.04
AFC = TFC/Q = 1,175.49
To calculate further, Q* = 13,611:
TC = 160,000,000 + 100Q + 0.0063212Q²
= 160,000,000 + 100(13,611) + 0.0063212(13,611)²
= 160,000,000 + 1,361,100 + 1,171,061.22
TC = 162,532,161.22
VC = 100Q + 0.0063212Q²
= 100(13,611) + 0.0063212(13,611)²
= 1,361,100 + 1,171,061.22
VC = 2,532,161.22
MC = 100 + 0.0126424Q
= 100 + 0.0126424(13,611)
MC = 272.07 (approximately)
In this case, the ATC is not minimized because it is not close to the MC calculation. The ATC remains at 1,348, while the MC is considerably lower. From a short-term perspective, if the conditions and costs of materials do not change, the price per unit will remain similar to its current level. This means the firm will be able to continue production by covering all costs without the need to shut down.
From a long-term perspective, TVC, AVC, and ATC will all grow at a rate correlated with annual production levels. Variable costs per unit will remain similar even if the firm increases production. However, total variable costs overall will rise in proportion to increases in production volume. At the same time, the total annual cost per unit will decrease as production scales up. Overall, the firm is in a healthy position for production in both the short and long run.
"Fixed cost increases, labor costs, shutdown scenarios"
"TVC, TR, profit calculation, automation benefits"
"Balanced scorecard, concentration ratios, benchmarking"
"Plant automation investment and supplier renegotiation plan"
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