Long-Term Capital Budgeting Decision

  • Uncategorized

Long-TermCapital Budgeting Decision

Aplan to be followed by the managers in the low-calorie, frozenmicrowaveable food company to anticipate the rising prices andresponding to the less elastic price changes.

Intoday’s life, most of the institutions are after feeding healthierfor a better life. Every person wants to stay healthy by living ahealthier lifestyle. More people have become much interested and keenwith their diets to ensure a low calorie or low food option. Publicsectors such as restaurants, schools, and even churches have alsobecome more interested in healthier feeding. This report will outlinea plan that is useful to the managers of the low-calorie, frozemicrowaveable food company and most especially when predicting therising prices and also in assessing the major impacts of thegovernment policy to its both workforce and productivity. The reportwill describe whether the government imposes fairness in itsregulation or if it increases complexities to the expansions of thecapital projects.


Themain objectives of the company should be based on keeping the pricesof the products as much inelastic as possible. The managers shouldensure that the pricing strategy has an insignificant impact on theconsumer’s perception of the prices of the products. This impliesthat, the prices should be inelastic in that, the changes in the ricelevels have no impact on the demand level of the product (McEachern,2013). Even if consumers cannot do without this product, the case istotally different for the microwaveable food products. With noperfect substitute products, the demand tends to be less impacted bythe prices. However, the demand function of the low-caloriemicrowavable foods seems to be largely influenced by the prices ofthe ingredients charged by the merchandisers. Other identified factorthat the manager in the company should consider includes theavailability of the substitute products, advertising strategies, andmost importantly the disposable income of the consumers.

Theprevious analysis and the estimation of the demand function provedthat the market for the low-calorie microwavable foods can beconsidered as a monopolistic competitive type. The market has areasonable number of buyers and seller and therefore, it qualifies asbeing monopolistic (Mudida, 2010). However, a soaring price willresult in consumers changing to another brand and therefore, the planshould be well-designed to avoid such situations. The company willalso be required to ensure product differentiation.

Thepricing strategy should also ensure profit maximization. This can beachieved by producing and selling the products at a price thatsatisfies the following conditions

Marginalrevenue – marginal cost = 0

 MR= MC

Atthis level, the profit P = Total revenue (TR) – Total Cost (TC)

TotalRevenue = Price * Quantity


AndTotal cost = TC

Sincewe saw that the demand for the low-calorie microwavable food producthas got is inelastic, the greatest concern of the management shouldbe to maintain this elasticity by executing this outlined plan andeffective pricing strategy. The company should also have an emphasison the differentiation strategy by differentiating its merchandisefrom those of other companies in the same industry. This will make itdifficult for the consumer to find close substitutes of the productand hence to maintain the inelasticity of the products. This willalso help in boosting the profitability of the company.

Examiningthe effects of the government policies on production and employmentand also in the market economy

Inall scenarios, we do need regulation for a smooth running of theactivities in our economy. Also, we still need regime regulationthrough government intervention. Most people believe that governmentregulation is pointless and unnecessary, and they consider it aswastage of time and resources. However, there are no ways markets canoperate without these regulations. There are those services andproducts that the government can offer best than any other privatesector. The government also stands to protect the consumers fromexploitation (McGuigan &amp Moyer, 2011). To illustrate these,consider a pure monopoly firm operating in a non-regulated market.The firm can charge any price to the consumers since the customershave no option of switching to the competitors substitutes. In a puremonopoly market, there exists only one buyer, and the buyers are theprice makers (Mudida, 2010). If in such a case there are no priceceilings, the monopoly will end up exploiting the consumers bysetting extremely higher prices. The government regulations aretherefore vital in protecting the economy of a country. Controllingexternalities is another important role of the government regulationsin the markets. The regulations also help in protecting the partiesinvolved in a contract by enforcing the laws governing the contract.

Whenit comes to the employment, government regulations play a vital rolein protecting the employees. The government has enforced the lawconcerning minimum wage level and also emphasizing on the rights ofthe employees in the United States. Human resource is the majorexpenditure of this company just like in any other firm. Governmentregulations on the wage level have imposed a great impact on theprofitability of firms. The firms have also failed to employ adequatelabor force with an attempt of cutting down the cost. This haseventually lowered the productivity of many firms, and the sameimpact is expected on the low-calorie, frozen microwaveable foodcompany.

Determiningwhether the government regulations are needed in ensuring fairness inthe low-calorie, frozen microwaveable food industry

Asit was discussed earlier, government regulation is very important tonearly every market. The US government must, therefore, ensure theprotection of the interest of the society. Government intervention istherefore required in the market since, without such regulations,there would be no efficiency. The regulation will also be beneficialto the company in that it will help in stabilizing the prices thatare at great threat of lowering due to the stiff competition in themarket economy. The government regulations will also help in avoidingintroduction of low-quality products. Such low-quality goods have agreat impact on creating price fluctuations. The governmentregulations will also help in protecting local industries from unfaircompetition.

Agood example of government involvement is due to the need ofregulating natural monopolies that may be created by firms. Ourgovernment has established laws that are meant to protect the rightsof the common residence from unfair practices by business such ascartels.

Thesecond example of the government intervention is in controlling thenegative externalities. The government has the responsibility ofensuring the protection of the citizens from mistreatments by thethird party. Most factories release smog, and this can be harmful tothe human health. The government should, therefore, take adequatemeasures to ensure that firms are taking appropriate measures tocontrol the effectiveness of their negative externalities. A studycarried out by Lin (2004) showed that the government should imposesevere penalties on those firms that are causing air pollution. Thiswill help in conserving the environment (Lin, 2004).

Examiningthe major complexities and the suggested actions to address thecomplexities

Beforeconsidering any capital investment decisions, it is wise for themanagers to develop appropriate budgets and to evaluate the viabilityof the expansion of the operations (McGuigan &amp Moyer, 2013). Themanagers of the company can ensure this by assessing the risk of theinvestments as well as carrying out the cost-benefit analysis. Acomplexity would arise in determining the source of capital tofinance the expansion. If a power struggle is experienced between themanagers and the shareholders, the best action could be to use thecapital reserves to finance the project. Another important issue toaddress in examining the complexities surrounding the source of fundsis the cost of capital as well as the return on capital.

Itis also advisable to involve various stakeholders in making theinvestment decision (McGuigan &amp Moyer, 2013). This will help insolving and managing any conflict that will arise in the course ofthe project. Consulting all stakeholders will ensure high projectacceptability and also enhancing successful the implementation of theproject.

Thesuggested manner in which the company would create a convergencebetween the interest of the shareholders and managers

Convergencein the companies is usually created through effective organizationalintegration. Managers have been given the responsibility ofcontrolling the overall affairs of the firm. This role is assigned tothem by the shareholders. The shareholders are the bosses or theprincipal while the managers are the agents. Managers are, therefore,expected to serve the interest of the shareholders by working towardstheir main objective of maximizing their wealth. However, it is notin all cases that the managers will act as they are required.Sometimes they are led by their self-interest, and they make thedecision for the firm for their personal gain. This results in whatwe call agency problem that eventually results in a conflict betweenthe shareholders and the managers.

Oneof the examples of actions that will help in responding to theconflict and convergence between the interest of the shareholders andthe managers is by providing incentives to the managers (Copeland &ampWeston, 2005). Managers should be remunerated in according to theprofitability of the firm. This will help in ensuring that themanagers are striving to achieve the maximum profitability of thefirm and also acting to serve the interest of the shareholders withan aim of maximizing their salaries.

Anotherexample could be the use of the voting rights. Through the annualgeneral meeting, the stockholders are required to vote for the seniormanagers whom they wish to continue working within that particularfinancial year. The stockholders are therefore free to vote only forthe managers who they feel or have faith in they will serve theirinterest.

Inconclusion, we have seen that Government regulation is important tothe company and also to the US economy. We have also examined thevarious factors that the firm will need to take into account whenconsidering the expansion via capital projects.


Copeland,T. &amp Weston, F. (2005). FinancialTheory and Corporate Policy.

FourthEdition, Addison Wesley.

McGuigan,J. Moyer, R. (2013). Managerial Economics 12thEd. Mason South Western: Cengage Learning.

Wooldridge,Jeffrey M. (2003),&nbspIntroductoryEconometrics: A Modern Approach,Second Edition, Ohio: South-Western.

MudidaR. (2010).&nbspIntroductionto modern economics, New York:Oxford Press.

McEachern,W. A. (2012). Microeconomics:A Contemporary Introduction.Mason, OH: South Western Cengage Learning.

Close Menu