A food processing firm makes chocolates by growing its own cocoa. The firm is considering contract farming to outsource the production of cocoa to a dedicated farming company. Currently, the annual fixed cost for the firm amounts to £750,000, which includes investments in land, agricultural machinery, storage facilities, and transportation infrastructure. The variable cost of labor and materials is £2,000 per ton of cocoa. A major contract farmer has quoted a price of £3,300 for per ton of cocoa to be delivered to the site.
a. What amount of cocoa should the firm consume to make the contract farming option feasible?
b. Assume the contract farmer invites the firm to share 50 percent of the costs. The contract farmer incurs £600,000 per year, which includes overheads and other fixed costs. For this concession, the contract farmer will drop the per ton price to £2,500. Under this assumption, how many tons of cocoa should the food processing firm purchase to make this feasible?
c. If the food processing firm is expecting to consume 500 tons of cocoa, which option (make in-house, use contract farming without sharing in the costs incurred, use contract farming with sharing in the costs incurred) is the least costly?