Introduction
McCain Foods was established by the three brothers i.e., Wallace, Andrew, and Robert in 1957. The Company is one of the largest food producers in the globe. In addition, it has a market share of approximately 33% and more than twenty thousand employees. The Company produces high quality and healthy foods. The company has good work ethics, where they believe that they should have a healthy relationship with workers and employees. This is the reason as to why the Company has flourished for the last 3 decades (Curtis, 2005). The other frozen food company that operates in the same market is Bird’s eye. Although it is an American firm, it has an extensive network in the UK and Ireland.
The company acquired several other well-established brands that include Riviera and McJenzie’s. The paper will look at how these two companies can maximize their profits in the UK. The mission of the Company is to offer high quality and low-calorie food to people in the United Kingdom. More so, the Company intends to sell all of its products at a fair price, targeting individuals drawn from all kinds of socio-economic backgrounds. The companies are different from their competitors because they sell low-calorie foods that are very tasty good to look at. More so, most individuals focus on healthy foods, this in return makes the companies outshine their competitors that sell high-calorie foods (Curtis, 2005). Both of these companies have acquired other established brands in a bid to increase their presence in the frozen food market. This has led to a largely monopolistic type of market in the frozen foods industry.
Target market
Most individuals in the United Kingdom are concerned about their health, thus prefer low calorie food. Therefore the companies have added advantages over their main competitors who mainly sell high calorie food such as Mac fries and KFC. The product is consumed by individuals from all socio- cultural background, and most buyers range from ages 20 and 55. In addition, women are the ones who mostly purchase the products, thus the companies highly concentrate on the female population (Curtis, 2005).
Change in Business operations
The change that has taken place in the market from a previous state of perfect competition to a largely monopolist competition means that the companies have increased control over how they price their products. This means that the rule of maximization of profits remains MR =MC, however, since the demand is downward sloping, P>MR, the companies can comfortably make profits that are above the industry average. There exist a number of factors that have contributed to an alteration of the market type structure. Chief among these factors is the firms’ ability to differentiate their produces from their closest rivals. The other factor has to do with the two largest companies in the frozen food industry acquiring smaller but established brands lading to a reduction in variety that is available to the end consumers.
Analysis of major long run and short run cost and production functions
As established by the food and agricultural organization in 2003, the costs and production function acts are the principle factors that determine a company’s economic situation in any micro economic analysis (Schotter, 2009). In trying to achieve a state of balance and maximize returns, a company is expected to consider various factors of production as well as any cost to be incurred during its operations. The short as well as long run production functions assist one in understanding a given market’s supply aspect.
The product’s price is normally determined by the cost of inputs. In this regard, in case the productivity diminishes, there is a requirement for more variable inputs so as to increase the overall quantity of goods (Besanko, Braeutigam, & Gibbs, 2011). This leads to an increase in the production costs leading to the companies increasing the prices of the goods so as to rake in the targeted profits. The production function(s) may be outlined as below:
Q = F * (X1 X2 X3….. Xn)
Whereby Q refers to the quantity of output and the variables X1, X2, X3 are the amounts of input such as required capital, labor, resources and land. On the other hand, a production cost analysis illustrates the relationship that exists between the costs and production of an item in a particular duration. The production costs may be calculated in the event that the required inputs of production are accurately outlined. In this regard, the production cost function may be illustrated as follows:
Q = a + b * x (V*I) + c * x* (V*I) 2 – d * x (VI)3
Whereby Q stands for the total volume or amount of the companies’ products, VI refers to the various elements of the firms’ variable inputs and the functions a b c and d are used to denote constants. The two companies may utilize this information by suppressing the costs of the variables VI to increase the profit margins through reducing costs. These variables may include wages payable to the workers, electricity and energy costs, logistics and distribution costs.
Aspects that may lead to the company’s closure
For the firms to be profitable, its product price (P) ought to be higher than its average total cost or ATC at the optimal output level. This is outlined by P > ATC. The firms will discontinue their normal operations in the short run in case the function assumes the form of P>AVC or in the long run when it assumes the form of P>ATC. In short, the shut down rule can be stated by P< AVC (Besanko, Braeutigam, & Gibbs, 2011). The management may avoid such a scenario through keeping the cost of inputs and other variables low so as to maintain a P> ATC equation. Increased costs of inputs may erode any profits that the company is supposed to earn.
Pricing policy to maximize profits
Regardless of the type of market, the level of profit maximization of the output is always attained at the point when MC = MR. The stand out feature of a perfect competition is often the absence of barriers to entry leading to a high number of smaller organizations offering identical goods and services. In such kind of a market, no single business has the privilege of influencing the prices in the market making the small firms price takers (Mankiw & Taylor, 2007). On the other hand, the stand out feature of a monopolistic competition has to be on product differentiation based on time, location.
Such differentiation offers the firms increased market power meaning more options in terms of pricing practices like block pricing, randomized pricing, commodity bundling, two-part pricing, cross subsidies, peak loading or penetration pricing (Hirschey, 2009). Since the market has been altered and leans towards a monopolistic kind, the firms can maximize their profits through block pricing which will increase profit margins per sale. Block pricing will the potential customers to make an all or none decision (Baye, 2010). By the companies packaging and selling their products as a single units, they earn more profits than if their products were sold at simple per unit prices.
Since MC =MR
The MC for a unit of frozen food = $ 7
Average premium profit margins in the frozen food industry stands at 33%
P = 1.33 (MC)
P= 1.33 (7)
P = $9.31
To break even, the firm is required to sell a minimum of 150 units per day
This means that daily revenue = 150* 9.31
R= $1397
Outline of plan that evaluates the companies’ financial performance
Calculating the firm’s short run profit
MR = MC = ATC
1397/1.33 = Short Run profit
$1050
Profit margins in a perfectly competitive market
Marginal cost = Total Cost Change/Quantity Change
The first unit’s marginal cost = 1(7.1-7.0) while that of the third unit produced is 3(7.4-7.2) etc
Actions that will improve the companies’ profitability
The companies will be able to rake in more profits in case it comes up with clear and workable advancement strategies. In such a case, the companies’ infrastructure should be able to support the success of the execution of the strategy. This can only be achieved if the companies grow leaders in all the managerial levels, get rid of any existing departmental silos and employ performance drivers that are in sync with the companies’ strategy (Schotter, 2009).
References
Baye, M. R. (2010). Managerial economics and business strategy. New York: McGraw Hill/Irwin.
Besanko, D., Braeutigam, R. R., & Gibbs, M. (2011). Microeconomics. Hoboken, NJ: John Wiley.
Curtis, J. (2005). Superbrands: An insight into some of Britain’s strongest brands 2005. London: Superbrands Ltd.
Hirschey, M. (2009). Fundamentals of managerial economics. Mason, OH: South Western Cengage Learning.
Mankiw, N. G., & Taylor, M. P. (2007). Microeconomics. London [u.a.: Thomson. Print
Schotter, A. (2009). Microeconomics: A modern approach. Mason, OH: South-Western Cengage Learning.