Long Term Investment Decisions Effects

Introduction

Microwavable low-calorie foods are a fairly recent trend that has gained significant interest in modern times. Schools, restaurants, and even prison facilities are feeding in a healthier manner. An increasing number of individuals are seeking to lead healthier more fulfilling lifestyles. This report will outline a viable plan for managers expecting an increase in product prices as well as examine the main effects that a jurisdiction’s government has on employment and production. The paper will also determine whether regulations enacted by the government to ensure fairness. It will also examine the main complexities that come with expansion through capital projects. The report will conclude by suggesting how a company may create a convergence between the stockholders’ and managers’ interests.

Plan Outline and Rationale

The company’s aim is to keep its primary products’ prices as inelastic as possible. This means that its pricing policy ought to have no effect on the way in which the final consumers perceive and purchase such items. Such demand is generally witnessed only in markets whereby the goods and services are deemed indispensable and the buyers cannot do for long periods without using the product. However, this is not the case when it comes to microwavable products (Arnold, 2010). The demand function when it comes to low-calorie microwavable food significantly demands the merchandise’s price, its substitute (relative) product, advertisement overheads, and finally the consumer’s disposable income.

Drawing from the elasticity and the demand function considered, it is well established that the market when it comes to low-calorie microwavable food fits into a monopolistically competitive market. Such a market is distinguishable by a significant number of sellers and purchasers. Due to this, consumers can easily switch to a different brand in case a particular brand charges exorbitant prices (Arnold, 2010). However, modern monopolistic competitive manufacturers or producers conduct product differentiation to distinguish themselves from their competition.

It should be noted that,

NP = TC * TR

Whereby,

Profit is denoted as NP

Total revenue is denoted as TR

Total cost is denoted by TC

Based on the FOC of maximization of profit,

= – [P =/= Fixed]

=MC * MR = 0

Meaning that MC = MR

From the observed elasticity level in the specific assignment, it can be observed that the demand for such low-calorie microwavable food items is not elastic. With the aim of maintaining its microwavable food as inelastic as feasible, the company has to differentiate the foodstuff from those that are offered by other similar firms. Making their products dissimilar from those produced by other players makes it difficult for customers to locate a direct substitute for the same. This will thus make the demand for an equivalent product to be just as inelastic (Arnold, 2010). The greater the degree of product differentiation, the greater the company’s market power over pricing. Therefore, it is only sensible for the firm to conduct extensive product differentiation so as to maximize on its profits.

Effects of Government Policies

A sitting government is tasked with regulating any market that falls under its jurisdiction. The other alternative to this is having an unregulated market. Government regulation is thus important to ensure there is an organized market and defined procedures to resolve disputes between industry players. However, too often there sprouts an urge to denounce government involvement as a waste or pointless without taking into consideration that there exist some duties that a sitting government can carry out better than the private sector. Provision of public goods, handling some externalities, enforcing legally binding contracts and supplying money or a medium of exchange; all of these are services that the government provides better than the private sector (Soule, 2003).

There ought to be more discussions that touch on where to draw the limits when it comes to government actions and interventions. To argue that one would be better off with no government intervention at all is just as short sighted as stating that the government ought to be in charge and direct every single economic activity that takes place within its jurisdiction (Soule, 2003). Neither of these actions will result in a balanced and ideal business or economic environment. The main reason for the involvement of the government in a market economy is to establish rules and guidelines that will govern the markets and utilizing the same force to enforce legislations. Additionally, reducing the level of economic uncertainty goes a long way in helping companies in the frozen microwavable foods to operate and rake in profits (Soule, 2003).

Whether Government Regulation Ensures Fairness

The core purpose of government intervention in the market is to enforce regulations that have been drafted in conjunction with the industry players. Government intervention is required in a market economy since without it, companies may flout rules that ensure there is a level playing ground for all the industry players. For example, without government intervention, larger companies may get into mergers and acquisitions ensuring a monopoly which, in the long run, leads to consumer exploitation through the provision of substandard goods and services (Soule, 2003). The role of the government in such a case is to oversee the acquisitions and mergers to ensure competition laws are not flouted. The purpose of a modern market economic environment is to attain optimal capacity, an issue that is likely to be overlooked in case of a monopoly.

With global warming becoming more of a concern around the world, the first example of governmental involvement would be in case a government intervenes when a company produces too much negative externalities such as smoke and smog leading to air pollution that affects the surrounding communities, flora and fauna. In the absence of government intervention, such a company may carry on with its activities with no regard to the effects it may have to the environment. For example, due to lax government environmental regulations enforcements, Chinas smog problem is so severe that it is forcing citizens to put on masks and minimize their outdoor activities (Shapiro, 2012).

Most of the goods produced are exported to the U.S. which has a government that strictly enforces environmental laws and regulations. Even though the U.S. also has manufacturing plants, its companies are required to adhere to stricter regulations for the sake of the environment (Soule, 2003). The downside to such strict regulations is an increase in the cost of production which eats away at the company’s bottom line. The other reason for government involvement is the requirement to protect the rights of consumers from unfair business practices (Soule, 2003). These are the same rights that led to the prosecution of Dennis Kozlowski after his $600 million dollar scandal.

Complexities Due to Expansion via Capital Projects

Before a firm considers expanding or merging its operations, its management has to take into consideration the reasons behind such a capital budgetary decisions. The principle reason for a merger or acquisition decision is to ensure the risks, costs, as well as future benefits of the undertaking are worth it. The source of such kind of capital will pose the greatest challenge for a company that is undertaking a capital investment. In such a case, a struggle may emerge between the company’s shareholders and its management (Baker & English, 2011).

The management’s easiest way to raising the required capital would be to train its focus on any available shareholders’ reserves. However, raising the required capital is not an easy undertaking since there are items that ought to be carefully evaluated. The cost of capital, the ease of obtaining it and the projected return on the capital should be carefully evaluated. In the current situation that touches on the frozen food market, the company should consider the size of the intended market and whether the capital project will lead to an increase in sales figures to recoup the investment. A capital project in such a case may be construction of a warehouse in a new region that the firm aims to expand to or acquiring fleets of trucks to ensure the company controls its own supply lines (Baker & English, 2011).

How the firm can create a convergence between the stockholders’ and managers’ interests

In business, there exist three key forces that come together to form a viable convergence between the managers’ and stockholders’ interests. These include the organization’s strategic decision-makers, their financial commitments as well as organizational integration. Managers have significant controlling interests over the affairs of a firm. On the other hand, stockholders posses a limited say over the managers’ actions despite the fact that they are the company’s real owners (Gunay, 2008).

While the stockholders’ principle aim is to maximize the company’s profits, the managers, on the other hand, seek to rake in higher incomes and allowances. In this case, managers may be opposed to any form of mergers that the company may wish to undertake since such an action may directly compromise their Job security. On the other hand, stockholders may seek to minimize their risk exposure through holding stocks in as many organizations as possible (Gunay, 2008).

However, the salaries and allowances of managers should be pegged on their ability to increase the company’s revenues and profits. This is the instance whereby their pay and allowances rise as a percentage of the firm’s profit in the course of a financial period. Doing this will ensure that the stockholders’ interests are taken care of since increased profit translates to more dividends for the shares held (Gunay, 2008). The United States Securities and Exchange Commission requires companies to publish up to date information on their financial position. They are expected to be submitted on a quarterly, half-yearly as well as annual basis to make sure that the shareholders are informed of the true verifiable financial position of the firm. This requirement has increased transparency in financial statements (Gunay, 2008).

Conclusion

It is crucial for a market economy to have some form of involvement of the government to regulate and ensure sanity prevails. Government involvement, if done correctly, can boost the confidence of industry players in a particular market. This leads to more players entering the market since it is regarded as a stable and profitable one. Appropriate government involvement ensures that both the stockholders’ and managers’ interests are well take care through a convergence of their interests.

References

Arnold, R. A. (2010). Economics. Australia: South-Western Cengage Learning.

Arnold, R. A. (2010). Microeconomics. Mason, OH: South-Western Cengage Learning.

Baker, H. K., & English, P. (2011). Capital budgeting valuation: Financial analysis for today’s Investment projects. (Capital budgeting valuation.) Hoboken, NJ: Wiley.

Gunay, S. G. (2008). Corporate governance theory: A comparative analysis of stockholder and Stakeholder governance models. New York: iUniverse.

Shapiro, J. (2012). China’s environmental challenges. Cambridge, U.K: Polity Press.

Soule, E. (2003). Morality & markets: The ethics of government regulation. Lanham, Md: Rowman & Littlefield Pub.

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