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ASSIGNMENT 2 INSTRUCTIONS
ECO550
From Assignment 1
 From Assignment 1, you will use the following
information:
Qs = -7909.89 + 79.1P
Qd = 38,650  42P
P = 384.48 cents and Q = 22,502 units
Question 1
 Outline a plan that will assess the effectiveness of
the market structure for the companys operations.
Note: In Assignment 1, the assumption was that
the market structure [or selling environment] was
perfectly competitive and that the equilibrium price
was to be determined by setting Qd equal to Qs.
The market structure in the first assignment was
competitive. This means that the firm does not
have control over the price and it has to charge
the equilibrium price. You are now aware of recent
changes in the selling environment that suggest
an imperfectly competitive market where your firm
now has substantial market power in setting its
own optimal price.
Question 1 Instructions
 Since the company has control over the price, it
has to decide how much to charge and how much
to produce to maximize profit.
 The profit-maximizing/loss-minimizing quantity
and price can be determined by setting the MR =
MC. This involves the following.
o Find the total revenue: TR = P x Q
o Find the marginal revenue by calculating the
derivative of the total revenue function.
o Set MR equal to the provided MC function and solve
for Q, and then for P.
 Based on the results, the company should make
a decision to continue producing or shut down.
Question 2
 Given that business operations have
changed from the market structure
specified in the original scenario in
Assignment 1, determine two (2) likely
factors that might have caused the
change. Predict the primary manner in
which this change would likely impact
business operations in the new market
environment.
Question 2 Instructions
 Consider the change in the degree of competition.
 Review the sections Industry Performance and
Competitive Landscape in the IBISWorld report
provided.
 Factors that might have caused change could be for
example consolidation of the industry, i.e., firms
become bigger and have now some control on the
price. Also, firms can differentiate their product
from the products of their competitors, which again
results in more control over the price. Firms’ actions
are interdependent and now their decisions are
affected not just by the demand and supply
conditions, but by what moves their major
competitors make. These are just examples. You
might come up with other factors.
Question 3
Analyze the major short run and long cost
functions for the low-calorie, frozen
microwaveable food company given the cost
functions below. Suggest substantive ways in
which the low-calorie food company may use
this information in order to make decisions in
both short and the long-run.
TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100 + 0.0126424Q
Question 3 Instructions
 To maximize profit, the firm has to find
ways to maximize its total revenue and
minimize its cost. You should also consider
the difference between short and long
run. In the short run, at least one of the
costs is fixed. In the long run, all costs can
be changes, i.e., all costs are variable. A
review of the IBISWorld Industry Report on
the frozen food production in the US can
cost functions affect the profit. The cost
functions are to be used to answer question
4 as well.
Question 3 Instructions
 Using the provided cost data for the firm,
determine whether the firm is making a
profit or a loss by charging the equilibrium
price determined in Assignment 1.
o Calculate the total revenue.
o Calculate the total cost.
o Find the difference between TR and TC, which is
the profit or the loss.
o Review the section Cost Structure Benchmarks
(p. 22) in the IBISWorld report.
Question 4
 Determine the possible circumstances under
which the company should discontinue
operations. Suggest key actions that
management should take in order to confront
these circumstances. Provide a rationale for
 Hint: Your firms price must cover average
variable costs in the short run and
average total costs in the long run to
continue operations.
Question 4 Instructions
 Here, you have to find the profit maximizing or
loss-minimizing quantity and price. Then,
determine whether the company is making a
profit. To find the value of Q and P, you should
use the marginal rule MR = MC.
 MC function is given.
 You should calculate MR by using the demand
function from Assignment 1: Qd = 38,650 – 42P.
o First, inverse the demand function to show the price
in terms of quantity: P = 920.238 – 0.0238Q.
o Then, find the TR function, which is equal to price
times quantity TR = (920.238 – 0.0238Q)*Q =
920.238Q – 0.0238Q2.
o Finally, find MR which is the derivative of TR with
respect to quantity, i.e., MR = 920.238 – 0.0476Q.
Question 4 Instructions
 Next, set MR equal to the MC given in the
second assignment and solve for the
profit maximizing or loss minimizing Q
and P.
 When you find the values of Q and P, you
can plug in the number for Q into the TR
function to find the TR and in the TC
function, to find the TC.
Question 4 Instructions
 Then, subtract TC from TR to find the total
profit.
o If you get a negative number, the firm is making a
loss.
o If the number is positive, the firm is making a profit.
o If the firm is making a loss, you should figure out
whether the firm should continue to produce at a
loss in the short run, or shut down. To answer this
question, you should compare the TR with VC, or
price with AVC. If the firm is making a loss and the
TR is higher than VC or the price is higher than the
AVC, then it would be better off producing rather
than shutting down because it will be able to cover
some of its fixed cost. But if TR is smaller than VC, or
if price is smaller than AVC, the firm will be better of
shutting down.
Question 5
Suggest one (1) pricing policy that will
microwavable food company to maximize
profits. Provide a rationale for your
suggestion.
Question 5 Instructions
Hints:
 In Assignment 1, you determined your firms
market demand equation. Now you need to find
the inverse demand equation. Having found that,
find the Total Revenue function for your firm (TR is
P x Q). From your firms Total Revenue function,
then find your Marginal Revenue (MR) function.
 Use the profit maximization rule MR = MC to
determine your optimal price and optimal output
level now that you have market power. Compare
these values with the values you generated in
Assignment 1. Determine whether your price
higher is or lower.
 Use the profit-maximizing rule MC = MR to find the
price and quantity that maximize profit.
Question 6
 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.
Question 6 Instructions
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.
 You can also review the section Key Statistics on p.
38 of the IBISWorld Industry Report Report.
Question 7 Instructions
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
 Review the sections Industry
Performance and Products and
Markets in the IBISWorld report.
Frozen Food Production in the US November 2013 1
WWW.IBISWORLD.COM
Keeping cool: Revenue will grow marginally as
producers focus on convenience and health
IBISWorld Industry Report 31141
Frozen Food Production
in the US
November 2013
Hester Jeon
2
34 Revenue Volatility
2
Industry Definition
35 Regulation & Policy
2
Main Activities
2
Similar Industries
21 Competitive Landscape
3
21 Market Share Concentration
38 Key Statistics
21 Key Success Factors
38 Industry Data
4
Industry at a Glance
22 Cost Structure Benchmarks
38 Annual Change
24 Basis of Competition
38 Key Ratios
5
Industry Performance
25 Barriers to Entry
5
Executive Summary
26 Industry Globalization
5
Key External Drivers
7
Current Performance
27 Major Companies
9
Industry Outlook
27 Nestle SA
11 Industry Life Cycle
36 Industry Assistance
39 Jargon & Glossary
28 The Schwan Food Company
29 ConAgra Foods Inc.
13 Products & Markets
30 H.J. Heinz Company
13 Supply Chain
14 Products & Services
33 Operating Conditions
15 Demand Determinants
33 Capital Intensity
16 Major Markets
34 Technology & Systems
www.ibisworld.com | 1-800-330-3772 | info @ibisworld.com
Frozen Food Production in the US November 2013 2
WWW.IBISWORLD.COM
Industry Definition
This industry includes companies
that produce frozen fruits,
vegetables and juices; frozen entrees
and side dishes (excluding seafood);
frozen pizza; frozen whipped
Main Activities
The primary activities of this industry are
toppings; and frozen waffles,
pancakes and French toast. These
products are then distributed to
grocery wholesalers, retail food
stores and the hospitality industry.
Producing frozen fruit and vegetables
Producing frozen fruit and vegetable juice
Producing frozen meals, pizza and whipped toppings
Producing frozen waffles, pancakes and french toast
The major products and services in this industry are
Frozen breakfast
Frozen vegetables and fruits
Prepared food
Other
Similar Industries
31122 Margarine & Cooking Oil Processing in the US
These establishments are primarily engaged in wet milling corn and vegetables; crushing oilseeds and tree
nuts; refining and blending vegetable oils; and manufacturing shortening and margarine.
31142 Canned Fruit & Vegetable Processing in the US
These establishments primarily manufacture canned, pickled, and dried fruits, vegetables and specialty
foods.
31152 Ice Cream Production in the US
Establishments in this industry are primarily engaged in manufacturing ice cream, frozen yogurts, frozen
ices, sherbets, frozen tofu and other frozen desserts.
31161 Meat, Beef & Poultry Processing in the US
These establishments are primarily engaged in slaughtering animals and preparing processed meats and
meat byproducts, such as manufacturing frozen specialty foods containing meat, like frozen dinners.
31194 Seasoning, Sauce and Condiment Production in the US
These establishments primarily manufacture dressings and sauces; spices, table salt, seasoning, flavoring
extracts and natural food colorings; and dry mix food preparations.
31199 Baking Mix & Prepared Food Production in the US
These establishments primarily manufacture food, including mixing purchased dried or dehydrated
ingredients for soup mixes and bouillon.
Frozen Food Production in the US November 2013 3
WWW.IBISWORLD.COM
For additional information on this industry
www.affi.com
American Frozen Food Institute
www.nfraweb.org
National Frozen and Refrigerated Foods Association
www.usda.gov
US Department of Agriculture
IBISWorld
writes over 700 US
industry reports, which are updated
up to four times a year. To see all
reports, go to www.ibisworld.com
WWW.IBISWORLD.COM
Frozen Food Production in the US November 2013
4
Industry at a Glance
Frozen Food Production in 2013
Key Statistics
Snapshot
Revenue
Annual Growth 08-13
Annual Growth 13-18
Profit
Exports
\$28.4bn 2.6%
\$1.4bn
\$2.0bn
Demand from frozen food wholesaling
Revenue vs. employment growth
Market Share
6
The Schwan Food
Company 9.1%
6
4
3
2
H.J. Heinz
Company 5.7%
% change
9
% change
Nestle SA 18.6%
ConAgra Foods
Inc. 7
.4%
0
-3
-6
Year 05
0.4%
523
0
-2
07
09
Revenue
11
13
15
17
19
-4
Year
07
09
11
13
15
17
19
Employment
SOURCE: WWW.IBISWORLD.COM
p. 27
Products and services segmentation (2013)
6.0%
Key External Drivers
7.4%
Demand from frozen
food wholesaling
Other
Frozen breakfast
Agricultural price index
External competition
for the Frozen Food
Production industry
Per capita disposable
income
56.0%
30.6%
Prepared food
Frozen vegetables and fruits
Time spent on
leisure and sports
Per capita fruit and
vegetable consumption
p. 5
SOURCE:
WWW.IBISWORLD.COM
SOURCE:
WWW.IBISWORLD.COM
Industry Structure
Life Cycle Stage
Mature
Regulation Level
Heavy
Revenue Volatility
Medium
Technology Change
Medium
Capital Intensity
Medium
Barriers to Entry
Medium
Industry Assistance
Medium
Industry Globalization
Medium
Concentration Level
Medium
Competition Level
Medium
FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 38
Frozen Food Production in the US November 2013 5
WWW.IBISWORLD.COM
Industry Performance
Executive Summary | Key External Drivers | Current Performance
Industry Outlook | Life Cycle Stage
Executive
Summary
The Frozen Food Production industry
benefited from lower disposable income
levels during the recession as
consumers opted for affordable frozen
food products at supermarkets and
grocery stores. Industry revenue spiked
in 2009, but sales declined as the
economy and disposable income levels
recovered. With more money to spend,
consumers purchased more fresh
produce over frozen varieties and dined
growing health concerns caused many
consumers to purchase less frozen
Product
innovation will benefit firms, but
demand for fresh foods will limit growth
prepared meals, which are often
perceived to be unhealthful. Operators
responded by introducing products with
healthier, more nutritious ingredients.
As a result of product innovation,
revenue is anticipated to grow an
annualized 2.6% to \$28.4 billion over
the five years to 2013, including an
increase of 2.0% in 2013.
Despite revenue growth in the past five
years, industry profit suffered primarily
due to rising commodity prices.
Marketing costs also dampened profit
aggressively introduced new products to
Key External Drivers
Demand from frozen food wholesaling
manufacturers and resell these
products to retailers, such as
supermarkets and grocery stores, where
consumers purchase industry products.
As consumers demand more frozen
foods from retailers, retailers and
industry operators, which boosts
revenue. Demand from frozen food
gain market share. Further complicating
the matter, many producers were unable
to pass on the rising cost of inputs to
downstream markets due to consumers
sensitivity to prices during the recession.
Consequently, profit fell from 6.1% of
revenue in 2008 to 5.1% in 2013. As
profit margins eroded, many producers
laid off some of their employees and
relied more on machinery and
companies like ConAgra found
acquisitions especially attractive due to
the cost savings that could be achieved
from economies of scale.
Over the next five years, operators
will continue to develop new products
that appeal to health-conscious
consumers and invest in marketing
campaigns to boost the image of frozen
work and have less time to prepare
meals from scratch, they will opt for the
convenience of frozen meals. However,
consumers are expected to purchase
more fresh produce as disposable
income levels continue to rise. Rising
income will also allow consumers to
dine out at restaurants more frequently.
Finally, the growing popularity of
imported frozen food products is
anticipated to dampen demand from US
producers. Ultimately, revenue is
expected to rise an annualized 0.4% to
\$28.9 billion in the five years to 2018.
wholesaling is expected to decrease in
2014, representing a potential threat to
the industry.
Agricultural price index
Raw inputs such as fruits, vegetables,
grains, processed meat, oils, sugar and
other commodities make up the primary
cost components for frozen food
producers. When the cost of these inputs
rises, profit becomes tight. Producers
Frozen Food Production in the US November 2013 6
WWW.IBISWORLD.COM
Industry Performance
have the option to pass on rising costs in
the form of higher prices to downstream
demand. The agricultural price index is
expected to increase throughout 2014.
External competition for the Frozen
Food Production industry
Frozen foods are typically easier to
prepare than their fresh counterparts.
However, consumers may prefer fresh
produce and fresh meat over frozen
alternatives due to their taste and the
perceived health benefits of fresh food.
Industry operators also face competition
from canned food producers and grocery
stores that sell prepared hot food.
External competition for the Frozen Food
Production industry is expected to
increase in 2014.
Per capita disposable income
While higher per capita disposable
income allows consumers to purchase a
greater volume of industry goods and
consumers also opt for alternative goods,
such as fresh produce and fast food.
Therefore, as income levels rise, demand
for frozen food falls as competitive
products become more popular. In 2014,
per capita disposable income is expected
to rise.
Time spent on leisure and sports
One of the primary benefits of frozen
prepared meals is that they are
convenient and save people time. As
consumers become busier and have less
time to spend on leisure activities,
demand for convenient products like
frozen meals grows. Time spent on
leisure and sports is expected to decline
in 2014, representing an opportunity for
industry operators.
The industry derives a growing proportion
of its revenue from exports, which are
sensitive to fluctuations in exchange rates.
When the value of the dollar falls, domestic
goods become relatively less expensive in
the global market, boosting industry
expected to increase in 2014.
Per capita fruit and vegetable
consumption
Consumers eating habits change as their
understanding of healthy living evolves.
Recent studies show that certain frozen
foods provide the same nutritional content
as fresh ones. Therefore, an increase in
fruit and vegetable consumption benefits
the industry. Per capita fruit and vegetable
consumption is expected to decrease slowly
in 2014.
Per capita disposable income
Demand from frozen food wholesaling
6
4
4
2
2
% change
% change
Key External Drivers
continued
0
-2
-2
-4
Year
0
07
09
11
13
15
17
19
-4
Year
06
08
10
12
14
16
18
SOURCE: WWW.IBISWORLD.COM
Frozen Food Production in the US November 2013 7
WWW.IBISWORLD.COM
Industry Performance
Healthy products
fight falling demand
The Frozen Food Production industry has
performed well over the past five years,
particularly during the recession, when
consumers turned to the frozen aisle of
grocery stores for cost savings. As per
capita disposable income levels eroded in
2009, Americans cut back on dining out
at restaurants and sought ways to trim
their grocery bills. Consequently, more
consumers began to eat at home, pack
lunch and purchase more affordable
products at groce …
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