The Cost Component of Kellogg's Cereal - Research Paper Example

Cost components of Kellogg’s cereals This article discusses the cost components and impact of new technology on Kellogg’s cereals. Many factors are affecting cost of commodity and have impact on revenue generated by Kellogg’s. With an increase in sales, the product lost its operational profit due to certain reasons. They are trying to maintain their profit margins. Kellogg’s incorporated an online marketing technology to improve the volume of sales and awareness. Impact of technology also improved the production capacity and reduces the total average cost of Kellogg’s cereals.

The Cost Component of Kellogg's Cereal Kellogg’s is the world leading producer of cereals and convenience foods. They offer a variety of cereals to kids for good taste and to moms for easy to make. Being a leading producer, Kellogg’s should consider the cost of its cereals and current issues dealing with it. In today’s era there are many factors affecting costs of products which became the source of rise in prices and quality reduction. Not only implicit costs but also explicit costs affect the product of a company.

Kellogg said that high commodity costs led to a one per cent decrease in operating profit during the third quarter, despite a six per cent increase in sales. Like many food companies, Kellogg is struggling to maintain margins as the cost of commodities, particularly sugar and wheat, continue to rise. (Charlotte Eyre, 2007) The marginal cost of production is the increase in total cost as a result of producing one extra unit. This cost cannot be affected by fixed cost of any commodity, due to which profit maximizing quantity and price does not change.

Revenue is the money the company receives for selling their product or service. It is calculated by taking the selling price and multiplying it by the number of units sold. When the prices of commodity increases due to environmental factors or regulatory changes, the revenue generation also increases with increase in the number of product sold which in turn changes the value of profit generated. Whereas, profit is the amount of money left over after costs have been covered. It is therefore calculated by: total revenue minus total costs.

Average total cost is the sum of all the production costs divided by the number of units produced. Virtual Traffic Master provides The Kellogg Company with detailed metrics describing the success of its online marketing programs. Manticore Technology’s solution enables front-line decision makers to take immediate action based on real-time analysis that improves the effectiveness and results of various online initiatives. As a remotely hosted solution, The Kellogg Company was able to implement Virtual Traffic Master in a matter of hours, allowing Kellogg to focus on its core competence rather than investing weeks or even months in information technology.

This technology use made the brand aware among people. Investments in technologies that reduce the firm's fixed overhead costs do not affect the firm's product quality and pricing decisions but do increase profits and improve productivity. In addition, we demonstrate that investments in technologies that reduce the variable costs of designing, developing, and manufacturing a product encourage the firm to improve product quality and to charge a higher price. Although this adjustment helps the firm to capture higher profits, we show that it will also increase total production costs and will, under a range of conditions, decrease firm productivity.

Finally, we show that the direction of firm productivity following such investments depends upon the relationship between the fixed costs of the firm and the size of the market. (Matt E. Thatcher, Jim R. Oliver. 2001) Improvement in technology for a manufacturing unit also decreases the total average cost with increase in production units. Kellogg’s cereals being a popular and leading product in the market, is dealing with the cost components and their changes. References Matt E. Thatcher, Jim R. Oliver. (2001).

The Impact of Technology Investments on a Firm’s Production Efficiency, Product Quality, and Productivity [Abstract]. Journal of Management Information Systems, 18, 17-45. Charlotte Eyre, (2007, Oct 29). Rising costs hit Kellogg’s profits. Retrieved from http://www.foodnavigator-usa.com/Financial-Industry/Rising-costs-hit-Kellogg-s-profits