You are an economist for the Vanda-Laye Corporation, which produces and distributes outdoor cooking supplies. The company has come under new ownership and management and will be undergoing changes in its product lines and operating structure. As an economist, your responsibilities include examining the market factors that affect success or failure of a product, including the supply and demand for the product, market conditions, and the behavior of competitors with similar products.
The new owners are evaluating the operating structure, and you have two possible alternatives. One alternative requires a high level of investment in fixed costs compared to the other alternative. Jorge, your supervisor, has assigned you the task of evaluating the two alternatives.
Assume that the company has no debt. Regardless of the alternative selected, market conditions will require the selling price of the product to be $3.45 per unit. The details for each alternative are given in the table.
(table is attached)
Tasks:
Jorge has asked you to provide detailed responses to the following questions:
- Analyze how the CVP analysis helps management in the planning stage of a new business.
- What is the break-even quantity for each of the investment alternatives?
- Analyze the breakeven differences between the two alternatives. What does the breakeven quantity tell you?
- Which alternative would you recommend to the company? Explain the pros and cons of each alternative and the reasons for your selection.
Submission Details:
- Submit a 3-4 page Microsoft Word document, using APA style
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Market Structures.html
Market Structures
Buyers and sellers come together in markets to exchange goods and services for either money or, in isolated cases, other goods and services. Economists have defined four market structures based primarily on the level of competition:
- Perfect competition
- Monopolistic competition
- Oligopoly
- Monopoly.
In perfect competition, so many companies deal in the same good or service that a single company does not have any influence over the price of the good or service. The only decision companies have to make is how much to supply based on the price determined in the market. There is no perfectly competitive company. However, most agricultural markets provide close approximations of how perfect competition would operate.
This is the most common market structure found in most economies. Here, there are many sellers of similar products differentiated in some way, and entry into and exit from the industry is relatively easy. The best examples are retail firms such as gas stations, fast-food restaurants, and clothing firms.
An oligopoly is a market structure that provides most of the goods in consumer markets. However, a given market has only a few of these companies. An example of an oligopoly would be airlines serving the same route.
In a monopoly, there is only one company in the market and that company has complete control over the price and output level. Monopolies are illegal in most countries, but where they are allowed, they are highly regulated by the government. Examples include electric companies, cable TV companies, and other utility companies.
Most companies do not fit into a single market structure. However, because the four structures have different pricing and output decisions, a company must be aware of the structure that is the best fit.
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Competitive Markets.html
Competitive Markets
Competitive markets are assumed to efficiently allocate resources to the production of goods and services. However, competitive markets are not perfect. They often do not allocate resources to the production of socially desired goods, such as police protection, because people who receive such goods or services cannot be forced to pay for them. Alternatively, sometimes, the market allocates too many resources to harmful activities, such as production activities that pollute the environment at no cost to the producer. When either of these events occurs, it results in market failure. Market failure is often called an externality, which can be positive or negative.
Positive externalities are situations in which a third party benefits from a transaction between some other parties. For example as society in general benefits from a higher level of education in the workforce, the government intervenes and provides funding to encourage allocation of more resources to education—more than what the markets would allocate if left alone.
Negative externalities are situations in which part of the cost of providing a good or a service is borne by a third party to the transaction. Assume the production process of a product involves disposing of contaminants into the air. Those exposed to the contaminants may fall ill. In this case, while the company pays for electricity, raw materials, and other inputs, the individuals exposed to the contaminants bear the negative effects—medical expenses and poor quality of life—of air pollution.
Most companies are characterized as competitive companies to some degree and have some control over price and output. Perfect competition is a theoretical model and does not exist in reality. Given the following conditions, competitive companies make decisions regarding prices and output levels:
- There are a large number of buyers and sellers.
- The products are somewhat homogeneous.
- Entry into and exit from the market are relatively simple.
- There is non-price competition, that is, a company tries to distinguish its product from competing products on the basis of a factor other than price.
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Government Regulations.html
Government Regulations
“Government affects what and how firms produce, influences conditions of entry and exit, dictates marketing practices, prescribes hiring and personnel policies, and imposes a host of other requirements on private enterprises. For example, local telephone service monopolies are protected by a web of local and federal regulation that gives rise to above-normal rates of return while providing access to below-market financing. Franchises that confer the right to offer cellular telephone service in a major metropolitan area are literally worth millions of dollars and can be awarded in the United States only by the Federal Communications Commission (FCC). The federal government also spends hundreds of millions of dollars per year to maintain artificially high price supports for selected agricultural products such as milk and grain, but not chicken and pork. Careful study of the motivation and methods of such regulation is essential to the study of managerial economics because of regulation’s key role in shaping the managerial decision-making process” (Hirschey, 2009, 418).
“Although all sectors of the U.S. economy are regulated to some degree, the method and scope of regulation vary widely. Most companies escape price and profit restraint, except during periods of general wage–price control, but they are subject to operating regulations governing pollution emissions, product packaging and labeling, worker safety and health, and so on. Other firms, particularly in the financial and the public utility sectors, must comply with financial regulation in addition to such operating controls” (Hirschey, 2009, 418).
Reference:
Hirschey, M. (2009). Fundamentals of managerial economics, (9th ed.). Boston, MA: Cengage Learning, ISBN13: 978-0324584837
A company must anticipate the changes in market conditions that will result from government intervention. The two tools the government most commonly uses to deal with market failure are taxes and subsidies. In addition, there may be penalties for a harmful activity or an extra cost to incur for the additional benefits from an activity that the company undertakes. These are considerations that management must take into account, especially in the long term.