Long-Term Investment Decision - Assignment Example

Question 1: Outline a plan that managers in the low-calorie, frozen microwaveable food company could follow in anticipation of raising prices when selecting pricing strategies for making their products response to a change in price. Provide a rationale for your response.

Rising prices in the food products for manufacturers has a negative impact on businesses which bring a big challenge to manufacturers. Over the last three years, the prices of agricultural products have risen sharply (Lipsey & Chrystal, 2015). This is because it results into unfavorable variances in the company’s production budget. An even greater challenge is the fact that perishable goods cannot be stored for long as compared to nonperishable goods. The management of the low-calorie frozen microwavable food can, however, prepare a feasible plan that would ensure that the rising prices do not come as a shock and disrupt its overall strategies. The company should undertake the following plan to ensure it sufficiently prepares for the rises in prices:

Keeping enough stock

As much as food products are perishable, the microwavable food products can stay for a longer time before going bad. This is an advantage for the company since it is in a position to maintain a higher stock level for a longer time. This will enable the company to maintain a lower production cost for some time in terms of the raw materials.

Buy locally

The company will be able to buy at a lower price from the local merchants. A food item that is locally produced is often offered at lower prices since the farmers do not incur higher costs when it comes to transportation costs and other related expenses.

Seek supplier loyalty

The company should select those suppliers from whom to buy, both in good as well as bad times. This will result in loyalty from these suppliers. During price increase the effects may not be as adverse as buying from random suppliers. They will increase their prices out of necessity and not to take advantage. This will thus lead to lower prices as compared to the going market prices.

Market penetration

The company should adopt the market penetration pricing strategy. This is a relevant option in attracting new customers by encouraging them to switch to the new products. A penetration plan tends to be effective in a price-sensitive market (Lamb & McDaniel, 2010). The company can then follow the competitor based pricing strategy once it acquires a reasonable market share.

Question 2: Examine the major effects that government policies have on production and employment. Predict the potential effects that government policies could have on your company

All through the world, governments participate in the social and monetary direction of the citizens' well-being (Machan, 1988). The government establishes economic and market regulation policies to guide the way businesses are operated. Government policy may have negative or positive effects on production as well as employment. A government incentive to increase agricultural production through, for example, subsidizing related factors of production will have the effect of lowering production costs to farmers. This will in turn translate to lower material costs to the manufacturers. Such a policy will have a positive effect on employment as well as production. In terms of production, there will be an increase as a result of the lower cost of production emanating from low material costs. In terms of employment, more jobs will be created. This is because producers will charge lower product prices which will make the consumers respond by purchasing more. Increased sales volumes will result in the need to employ more people in order to meet the increased production needs. On the other hand, increased government spending and a high fiscal policy for high-interest rates are government policies that discourage production and may result to joblessness.

Increased government spending and expansionary fiscal policies result to the imposition of higher tax and interest rates respectively. This leads to an increase in the cost of production for firms. In turn, the firms will have to reduce production in response, which will necessitate retrenchment, leading to joblessness to people who were previously employed. The future effects of government policy on the company revolve around the economic policy. The economic policy includes the fiscal policy, interest rates as well as government spending. The increasing taxes, as well as interest rates, may have a negative effect on the firm by increasing the cost of production. An increasing government spending on the agricultural sector will result in lower costs of production. The general effect may be neutral. Corporate commerce should be controlled because corporations are chartered by states, (Machan, 1988).

Question 3: Determine whether or not government regulation to ensure fairness in the low-calorie, frozen microwavable food industry is needed. Cite the major reasons for government involvement in a market economy. Provide two (2) examples of government involvement in a similar market economy to support your response

Sometimes, it is important for the government to restrict competition and thus correct market failures. In the quest to protect businesses from unfair competition, governments set tighter rules on what constitutes fair competition among business entities. Government regulations to ensure fairness in this industry is necessary in order to ensure fair competition practices among the firms in the industry, as well as consumer protection. The government mainly intervenes in the market economy in order to ensure an efficient allocation of resources through various types of interventions (Machan, 1988). First, the government intervenes through regulations, subsidies, and taxation when aiming to reduce market inequalities. Secondly, the government objective may be to promote general economic fairness. Thirdly, it is the duty of the government to maximize the social welfare of its citizen. Through this objective, the government may intervene through such measures as preventing pollution and breaking up monopolies.

The other objective of government intervention is to promote other goals such as national unity and development. An example of government intervention in the food industry is the food safety modernization Act that was passed by the American Government in 2011, being the first substantial piece of federal food safety regulation after many years. This act is meant to protect the consumer from harmful food products. Another example of government intervention in the food industry business is in India when, in 2015, the finance minister announced the setting up of a Rs. 2000 fund (Machan, 1988). This fund was meant to provide loans to entrepreneurs to set up food processing businesses in designated food parks.

Question 4: Examine the major complexities that would arise under expansion via capital projects. Propose key actions that the company could take in order to prevent or address these complexities.

Capital projects require additional expenditure and resources to introduce a change to the capital base of the organization (Lester, 2007).There are major complexities that may arise as a result of an organization opting to expand through capital projects. The primary complication is cauused by the fact that capital projects are very costly and involve large funds to put them in place. This will require the company to source for sufficient funds through various means that may include applying for loans or increasing the capital base through selling more stocks which may be opposed by the investors. The other complexity emanates from the inflexibility of the capital projects.

Expenditure on capital projects involves sunken costs which cannot be reversed or converted into other projects. As a result, capital projects have a very high redundancy level due to obsolescence. An organization can undertake various actions in order to prevent or address these complexities. Considering the importance of capital projects, an organization should undertake an analysis of the risks, costs, and benefits that will be associated with the expansion strategy (Lester, 2007). This is to enable the determination of the feasibility of the project. The organization should also design an effective business plan that will address how the shareholder profits can be increased through expansion, so that it increases the shareholder value and thus, supported by the investors.

Question 5: Suggest the substantive manner in which the company could create a convergence between the interests of stockholders and managers. Indicate the most likely impact to the profitability of such a convergence. Provide two (2) examples of instances that support your response.

Clashes between the corporate administration and shareholders are alluded to as office expenses and are borne by shareholders. Convergence of stockholders and managers interest will eliminate the conflict of interests between the management and the shareholders. Such a convergence can be achieved through several ways. First, it is through the existence of corporate shares being owned by large institutional companies such as banks, pension funds and insurance companies (Shaftoe, 2016). The impact this will have on the profits is to result in an increase. This is because these institutions continuously study stock performance through their financial analysts and in the case of poor performance, such stocks will be sold leading to drastic falls in share prices that might lead to hostile takeovers. As a result, the current managers will end up losing their positions.

In order to prevent this, they are forced to act in the best interest of the shareholders and thus increase profits. Secondly, management remuneration should be tied to performance. This will have a positive effect on the firm’s performance in terms of higher profits since the management will want to maintain or even increase their remunerations through better performance. Thirdly, managers should be given stock options in order to have a share in the company. Being part of the shareholders in the company will necessitate the managers to maximize stockholder welfare. Shareholder welfare is maximized through increasing profits. As such, the implication will increase in profits (Shaftoe, 2016). For example, General Motors offers stock options to its top executives, a practice that is common in many publicly owned companies. The Coca-Cola Company has a compensation committee to evaluate and approve compensation plans for the company’s senior executive group. This ensures that their remunerations are tied to their performance.