Read the information below about CoastCocoa, the largest cocoa-processing firm in a West African country. It buys cocoa beans from primary-sector farms, pro...
Question 1 Report
Read the information below about CoastCocoa, the largest cocoa-processing firm in a West African country. It buys cocoa beans from primary-sector farms, processes them into cocoa butter and powder, and sells these products to food manufacturers. CoastCocoa is one of four major firms in the market, so it operates in an oligopoly. In the last year, its total revenue was £18.0 million. Its costs were £4.5 million for cocoa beans, £6.0 million for labour and energy, and £2.5 million for packaging, transport and finance. The government is considering a grant for new energy-efficient machinery. Managers claim that the machinery would lower production costs and allow the firm to compete more strongly with overseas suppliers. Critics argue that the largest firms may gain most of the benefit.
(a) Describe what is meant by profit for CoastCocoa. [2]
(b) Calculate CoastCocoa's profit in the last year. Show your working. [3]
(c) Explain two ways in which an increase in CoastCocoa's scale of production could reduce its average costs. [4]
(d) Explain why a rise in cocoa-bean costs may not lead immediately to a higher price in this oligopoly market. [5]
(e) Examine whether the government grant is likely to increase CoastCocoa's profit and economic growth in the country. [5]
Answer Details
(a) Profit is the difference between CoastCocoa's total revenue and total costs, or the amount remaining after all production costs have been paid. [2]
(b) \[TC=£4.5\text{m}+£6.0\text{m}+£2.5\text{m}=£13.0\text{m}\]
\[\text{Profit}=£18.0\text{m}-£13.0\text{m}=£5.0\text{m}\]
Profit is £5.0 million. [3]
(c) Purchasing economies arise if bulk purchases of beans or packaging gain discounts, lowering cost per unit. Technical economies arise if larger, efficient machinery increases output per hour and spreads machinery costs over more products. Specialist managers and cheaper borrowing are further valid economies. [4]
(d) Oligopoly firms are interdependent. CoastCocoa may fear losing customers if it raises price while rivals do not. Rivals may have cheaper bean stocks, and the firm may absorb costs through a lower profit margin, make savings elsewhere, wait for rivals' pricing decisions, or be constrained by fixed-price contracts. Therefore a cost increase need not immediately raise price. [5]
(e) The grant lowers the cost of investment, while energy-efficient machinery can reduce energy cost per unit. If price and sales are maintained, lower average costs raise profit; lower prices or higher output may improve competitiveness and exports, potentially increasing employment and economic growth. However, benefits may mainly go to a large firm, demand may be insufficient, machinery could replace workers, and government spending has an opportunity cost. Overall, the outcome depends on demand, the size of the saving and how CoastCocoa uses it. [5]
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