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Food Industry: Operation Management
The food industry is probably one of the most competitive industry in the world. The huge customer base and the different tastes and preferences of buyers present a perfect opportunity for investors to venture into this industry. However, with the growing concern about the health effects of various meals, consumers are now sensitive about the quality of meals, the price of these commodities, and their packaging. In light of this, this industry over time adopted a monopolistic type of market.
Kraft Heinz and Nestle are two of the renowned world processors and producers or organic low calorie health foods. This market is difficult for new entrants to venture into due to the high amount of capital investments that the investors must be prepared to risk. In particular, there are enormous costs involved in the planting of organic foods or in the contracting of farmers. In addition, there are the costs involved in establishing the processing plants and the necessary supply chain to various markets. Lastly, and probably the most challenging part is the establishment of a brand for various products.
Since products in the organic food industry are sold as brands, this market is a monopolistic market. Companies do not directly compete on the type of products that thy sell. In fact, most of them use different recipes for their products, which differentiates them from those of competitors.

  1. Effectiveness of the Market Structure to Nestlé’s Operations

            Product differentiation is an important aspect of this market that enables Nestle to have a competitive edge over other manufacturers. The company rival products do not compete directly with its products due to the use of different packaging materials. In addition, this method enable the company to focus on selling to its specific target customer’s in the entire market. Therefore, Nestlé’s products that are targeted to high-income buyers can be sold at a high price, which enable the company to maximize profits (Stevenson, 2014).
There is always an imperfect flow of knowledge in this market. Therefore, businesses’ that have this information can be able to make maximum profits by adjusting prices of their commodities depending on the information that they have accessed (Stevenson, 2014). Since Nestle is the largest seller, it has the advantage of getting information earlier than most of its competitors. In turn, this enables it to make strategic decisions that make it to attract more customers.
2a . Factors that may Have led to Imperfect Competition
            One of the main characteristic of perfect competition is that the products, which are sold, are homogeneous. However, businesses in the low-calorie market food market normally want to differentiate themselves from competitors by selling slightly different products. To achieve this goal, companies normally use different packaging materials, flavor, and different size of packaging material. The choice of the packaging material and flavor depends on the target market. Therefore, companies that use expensive materials target high-income customers, and accordingly charge high prices. Those that use low cost packaging materials target low-income customers and accordingly charge low incomes.
Another cause for the emergence of the imperfect competition is the lack of free flow of information in the market. Some businesses, especially those that have been in the industry for a long time normally have more information on the changing consumer behaviors, the maximum amount that each customer is willing to pay, and the most preferred packaging and selling methods. Consequently, these businesses implement appropriate strategies depending on their target market so that they may make maximum profits. As a result, the uneven distribution of information results in the emergence of imperfect competition.
2b. Manner in Which the Change May Affect the Business
            The change may enable Nestle to charge its products a higher price than its competitors. In this case, the company will be able to make maximum profits. The primary reason for this situation is that in a monopolistic market, products are branded and differentiated from those of competitors. As a result, there is usually no perfect substitute for any of the products manufactured by the various businesses. Therefore, customers pay more for their desired products (Hitt, Ireland, & Hoskisson, 2016).
The lack of free flow of information will enable Nestle to identify the right strategies to adopt, by taking advantage of its exclusive ownership of information. Consequently, it will be able to make more profits by pricing its products at the profit maximizing points. In addition, since customers do not have enough information of similar but cheap products, the company will be able to make maximum profits using this method.

  1. Short Run Cost Function

TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100 + 0.0126424Q
If
QD = – 5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M
Where
QD is demand for 3 packets,
P= 500 cents for 3 packs
PX= 600 cents, price of competitor
I= $5500 for strategic location
A= $10,000 advertisement cost
M= $ 5000 microwave solds
Equation
QD (3 packs) = – 5200 – 42P + 20(6) + 5.2(5500) + 0.20(10,000) + 0.25(5,000)
QD(3 pack)= 26770-42P
QD= 8923.3-14P
Inverse Demand= P= 637.38- 0.071429Q
Further, Market demand= market supply
The short run price= average revenue= marginal revenue
AR=MR=P
AR= (P*Q)/Q= P
The firms supply function =Marginal cost (MC)
MC=P
MC= 100 + 0.0126424Q
TR= P*Q
TR= 637.38Q- 0.071429Q2
MR= 637.38- 0.142858Q
MC=MR=P
100 + 0.0126424Q = 637.38- 0.142858Q
Q= 3456
P=637.38- 0.071429(3456)
P= 143.69
From this model, in the short run, the optimal number of units is 3456. The optimal price level is $143.69 for each unit
Long run
TC = 160,000,000 + 100Q + 0.0063212Q2
ATC= 160,000,000/Q+ 100+ 0.0063212Q
LAC=160,000,000Q-1+ 100+ 0.0063212Q
MC= 100 + 0.0126424Q
(∂LAC/∂Q)= -160,000,000Q-2 + 0.0063212
160,000,000Q-2 = 0.0063212
Q2 =√(160,000,000/0.0063212)
Q=159096
P min= LAC
P min= 2111.3597
From the above model, in the short run, the company must produce a minimum of 159096 units. In addition, it must make an income of $2111.36 from its entire sales.

  1. Circumstance Under Which the Company Should Discontinue Operations

Short run
The decision on whether to continue in the operation of a business or whether to close it is determined by the profitability of the business as well as its ability to break even. In the short run, the business must produce at a level that enables it to cover its entire variable cost. If the business is unable to cover its variable costs, it must be closed down. Operating such a business is a loss.
From the above model, the variable cost is given as below
Variable cost (VC) = 100Q + 0.0063212Q2
Since Q is Q= 3456
VC= 100*3456+ 0.0063212(34562 )
=345600 + 75,500.0063
=421,100.0082 (The total variable cost)
All units produced must be able to at least earn 421,100.0082
 
Long Run
In the long run, the total cost of all units must cover at least the average total cost of production. The long run average cost of production is given by the model LAC=160,000,000Q-1+ 100+ 0.0063212Q
LAC=160,000,000/159096+ 100+ 0.0063212*159096
LAC= 2111.36
In the long run, the number of units produced increase to 159096. However, since this is an imperfect market, the business is able to differentiate itself and increase its price.
 

  1. Pricing Decision

The decision on the price of additional units depends on the added product ability to cover its entire marginal cost. In this model, every additional unit must cost at least $143.69. The production output must be maintained at the point where the selling cost is more or equal to $143.69. If it is less, the production must be stopped.
MC=MR=P
100 + 0.0126424Q = 637.38- 0.142858Q
Q= 3456
P=637.38- 0.071429(3456)
P= 143.69
At this pricing level, every additional unit fully covers its entire cost of production. This price is the minimal that the company must charge in order to avoid making a loss. Since the business operates in a monopolistic market, it can charge more depending on its level of control of its section of the market.
Inverse demand equation
QD = – 5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M
Where
QD is demand for 3 packets,
P= 500 cents for 3 packs
PX= 600 cents, price of competitor
I= $5500 for strategic location
A= $10,000 advertisement cost
M= $ 5000 microwave solds
QD (3 packs) = – 5200 – 42P + 20(6) + 5.2(5500) + 0.20(10,000) + 0.25(5,000)
QD(3 pack)= 26770-42P
QD= 8923.3-14P
Inverse Demand= P= 637.38- 0.071429Q
Total Revenue (TR= P*Q)
TR= (637.38-0.071429Q)Q
TR= 637.38Q- 0.071429Q2
MR=637.38- 0.142858Q
MC= 100 + 0.0126424Q
MR= MC
Therefore
637.38- 0.142858Q= 100 + 0.0126424Q
537.38/0.1555=Q
Q= 3455.8
P= 637.38- 0.071429Q
P= 637.38- 0.071429* 3455.8
P= 637.845- 246.845
P= $ 391
In the new model, since the company has more market power it can control the supply and price of commodities. In this new model, the company charges $391, up from the previous cost of 300. It also supplies 3456 units. This price is higher than the one that was in a perfect market since the business is now maximizing profits.

  1. Plan Outline

Profits= TR-TC
TR= 637.38Q- 0.071429Q2
TR= 637.38* 3456- 0.071429* 34562
TR= 1,349,641.88
TC = 160,000,000 + 100Q + 0.0063212Q2
VC= 100Q + 0.0063212Q2
FC= 160,000,000
TC = 160,000,000 + 100* 3456 + 0.0063212* 34562
TC= 160,421,100
VC= 421,100
Profit/ Loss= 1,349,641.88- 160,421,100= -159071,458.1
Decision Making
In the short run, the business must produce at a level that enables it to cover its entire variable cost. If the business is unable to cover its variable costs, it must be closed down (Heizer & Render, 2013). Operating such a business is a loss. In this model, the variable cost is 421,100 and the total revenue is 1,349,641.88. Therefore, the company should produce more units at the current price levels since they have a positive contribution. The business made a loss of  159071,458.1
The contribution of each unit is calculated as below:
(TR-TVC)/Q
(1349,641.88-421,000)/3456= 268.675
Therefore, in order for the company to breakeven, it must produce at least the following units:
160,000,000/268.675= 595,515 units
In the long run, the decision of the business to continue being in operation depends on its profitability.
TR=PQ
AR=P
MR=P
TC= AC*Q
MC= AC
TC = 160,000,000 + 100Q + 0.0063212Q2
MC=P
MC= 100 + 0.0126424Q
ATC= 160,000,000/Q+ 100+ 0.0063212Q
LAC=160,000,000Q-1+ 100+ 0.0063212Q
(∂LAC/∂Q)= -160,000,000Q-2 + 0.0063212
160,000,000Q-2 = 0.0063212
Q2 =√(160,000,000/0.0063212)
Q=159096
P min= LAC= 160,000,000Q-1+ 100+ 0.0063212Q
P= $ 2111.3597
Total Revenue (TR= P*Q)
TR= (637.38-0.071429Q)Q
TR= 637.38Q- 0.071429Q2
MR=637.38- 0.142858Q
MC= 100 + 0.0126424Q
MR= MC
Therefore
637.38- 0.142858Q= 100 + 0.0126424Q
537.38/0.1555=Q
Q= 3455.8
The valid assumption for this market is model 5. In model 3, the average price jumps from $143.69 in the short run to $ 2111.3597 in the long run. This change is not realistically possible and cannot work in a competitive environment. In addition, an increase in quantity is normally followed with a decrease in price, not an increase as shown in this model (Froeb, McCann, Ward, & Shor, 2015). In a competitive environment, businesses sell products at the point where marginal revenue equals marginal cost. Therefore, the optimal prices and outputs are Quantity 3456 and price 396 as shown below. Companies that cannot produce at these levels relocate to another industry.
Inverse Demand= P= 637.38- 0.071429Q
Total Revenue (TR= P*Q)
TR= (637.38-0.071429Q)Q
TR= 637.38Q- 0.071429Q2
MR=637.38- 0.142858Q
MC= 100 + 0.0126424Q
MR= MC
Therefore
637.38- 0.142858Q= 100 + 0.0126424Q
537.38/0.1555=Q
Q= 3455.8
P= 637.38- 0.071429Q
P= 637.38- 0.071429* 3455.8
P= 637.845- 246.845
P= $ 391
Actions that the company could take in order to improve its profitability and deliver more value to its stakeholders.
In order to improve its profitability, the company must focus on differentiating its products so that it can be able to sell them at a premium. Using this method, the company will be able to increase its selling costs to $391. In addition, differentiation will ensure that it does not face stiff competition from rival businesses when they introduce almost similar products.
Further, the business must sell its products at the point where marginal cost is equal to marginal revenue. This is the profit maximizing point. The outputs produced at this level are the profit maximizing outputs. Therefore, the company should produce 3456 units to maximize outputs (Boyes, 2011). Producing beyond this level will lead to a decline in selling cost, which will result in a decline in profits.
 
References
Boyes, W. (2011). Managerial economics: Markets and the firm (2nd Ed.). New York, NY: Cengage Learning.
Froeb, L., McCann, B., Ward, M., & Shor, M. (2015). Managerial economics (4th Ed.). New York, NY: Cengage Learning.
Heizer, J., & Render, B. (2013). Operations management (11th Ed.). Upper Saddle River, NJ: Pearson.
Hitt, M., Ireland, D., & Hoskisson, R. (2016). Strategic management: Concepts and cases: competitiveness and globalization (12th Ed.). New York, NY: Cengage Learning.
Stevenson, W. (2014). Operations management (12th Ed.). New York, NY: MacGraw-Hill Publishers.