Cost & Production Analysis.
Margaret Mogute
BUS 1103-01 - AY2024-T4
Assignment Activity Unit 5
Instructor- Joshua Longmire
University of the People
[5/15/24]
Assignment Title: Cost and Production Analysis: A Case Study of GreenHarvest
Farms'
Introduction:
GreenHarvest Farms is a leading agricultural company specializing in the
production of organic fruits and vegetables. The short-run cost structure of the
company is given below:
Cost & Production Analysis.
Quantity Produced (Q)
Price (P)
Total Cost (TC)
Total Revenue (TR)
100 tons
$200
$30,000
$20,000
200 tons
$180
$55,000
$36,000
300 tons
$160
$80,000
$48,000
400 tons
$140
Cost & Production Analysis.
$110,000
$56,000
500 tons
$120
$140,000
$60,000
The market demand for organic fruits and vegetables is expected to increase to
1000 tons next year. The company is planning to expand its production capacity to
meet the growing demand for organic produce.
Based on the case summary, write a detailed report for GreenFarm Harvest that
covers the following sections
Cost and Production Analysis: A Case Study of GreenHarvest Farms
Introduction
GreenHarvest Farms is a leading agricultural company specializing in the production of organic fruits
and vegetables. The short-run cost structure of the company is provided in the table below:
Cost & Production Analysis.
| Quantity Produced (Q) | Price (P) | Total Cost (TC) | Total Revenue (TR) |
|----------------------|-----------|-----------------|-------------------|
| 100 tons | $200 | $30,000 | $20,000 |
| 200 tons | $180 | $55,000 | $36,000 |
| 300 tons | $160 | $80,000 | $48,000 |
| 400 tons | $140 | $110,000 | $56,000 |
| 500 tons | $120 | $140,000 | $60,000 |
The market demand for organic fruits and vegetables is expected to increase to 1000 tons next year.
The company is planning to expand its production capacity to meet the growing demand for organic
produce.
1. Defining Key Concepts
Production: Production refers to the process of transforming inputs (such as land, labor, and capital)
into outputs (goods and services) that have economic value. In the context of GreenHarvest Farms,
production involves the cultivation, harvesting, and processing of organic fruits and vegetables.
Cost: Cost refers to the monetary value of the resources used in the production process. In the case of
GreenHarvest Farms, the total cost (TC) includes the expenses incurred for land, labor, equipment, and
other inputs required to produce the organic produce.
Cost & Production Analysis.
Revenue: Revenue refers to the total amount of money received from the sale of goods or services. For
GreenHarvest Farms, the total revenue (TR) is the product of the quantity of organic produce sold (Q)
and the price (P) at which it is sold.
Productivity: Productivity is a measure of the efficiency with which inputs are transformed into out-
puts. In the context of GreenHarvest Farms, productivity can be measured by the amount of organic
produce (output) generated per unit of input (such as land, labor, or capital).
These factors are interconnected and contribute to the overall performance and profitability of Green-
Harvest Farms. The company's production decisions, cost management, and pricing strategies directly
impact its revenue and, ultimately, its profitability.
2. Short-Run Cost-Revenue Analysis
Calculations
Average Cost (AC):
- AC = TC / Q
- AC for 100 tons = $30,000 / 100 = $300
- AC for 200 tons = $55,000 / 200 = $275
- AC for 300 tons = $80,000 / 300 = $266.67
- AC for 400 tons = $110,000 / 400 = $275
- AC for 500 tons = $140,000 / 500 = $280
Cost & Production Analysis.
Marginal Cost (MC):
- MC = ΔTC / ΔQ
- MC between 100 and 200 tons = ($55,000 - $30,000) / (200 - 100) = $250
- MC between 200 and 300 tons = ($80,000 - $55,000) / (300 - 200) = $250
- MC between 300 and 400 tons = ($110,000 - $80,000) / (400 - 300) = $300
- MC between 400 and 500 tons = ($140,000 - $110,000) / (500 - 400) = $300
Average Revenue (AR):
- AR = TR / Q
- AR for 100 tons = $20,000 / 100 = $200
- AR for 200 tons = $36,000 / 200 = $180
- AR for 300 tons = $48,000 / 300 = $160
- AR for 400 tons = $56,000 / 400 = $140
- AR for 500 tons = $60,000 / 500 = $120
Marginal Revenue (MR):
- MR = ΔTR / ΔQ
- MR between 100 and 200 tons = ($36,000 - $20,000) / (200 - 100) = $160
- MR between 200 and 300 tons = ($48,000 - $36,000) / (300 - 200) = $120
- MR between 300 and 400 tons = ($56,000 - $48,000) / (400 - 300) = $80
- MR between 400 and 500 tons = ($60,000 - $56,000) / (500 - 400) = $40
Cost & Production Analysis.
Profit or Loss:
- Profit = TR - TC
- Profit for 100 tons = $20,000 - $30,000 = -$10,000 (loss)
- Profit for 200 tons = $36,000 - $55,000 = -$19,000 (loss)
- Profit for 300 tons = $48,000 - $80,000 = -$32,000 (loss)
- Profit for 400 tons = $56,000 - $110,000 = -$54,000 (loss)
- Profit for 500 tons = $60,000 - $140,000 = -$80,000 (loss)
Analysis
The cost-revenue analysis reveals the following insights:
1. Average Cost (AC): The AC initially decreases as production increases from 100 tons to 300 tons,
indicating the presence of economies of scale. However, the AC starts to increase from 300 tons on-
wards, suggesting the presence of diseconomies of scale.
2. Marginal Cost (MC): The MC increases as production increases, indicating that the company is fac-
ing rising marginal costs. This is a typical characteristic of the short-run production function.
3. Average Revenue (AR): The AR decreases as production increases, reflecting the downward-sloping
demand curve for organic produce.
Cost & Production Analysis.
4. Marginal Revenue (MR): The MR also decreases as production increases, indicating that the com-
pany faces a less elastic demand curve at higher levels of production.
5. Profit or Loss: The company is experiencing losses at all levels of production, as the TR is lower
than the TC. This suggests that the company is not operating at the optimal level of production in the
short run.
3. Economies or Diseconomies of Scale
Based on the analysis of the Average Cost (AC) values, GreenHarvest Farms experiences both
economies and diseconomies of scale in the short run.
The AC initially decreases as production increases from 100 tons to 300 tons, indicating the presence
of economies of scale. This means that the company can achieve lower average costs by increasing its
production. Economies of scale can be attributed to factors such as better utilization of fixed costs, im-
proved efficiency in the production process, and the ability to negotiate better prices for inputs.
However, the AC starts to increase from 300 tons onwards, suggesting the presence of diseconomies of
scale. This means that the company's average costs begin to rise as production increases beyond a cer-
tain level. Diseconomies of scale can be caused by factors such as overcrowding, coordination prob-
lems, and the increased complexity of managing a larger operation.
4. Recommendations for Short-Run Profitability
Cost & Production Analysis.
Based on the analysis, GreenHarvest Farms should not increase its production beyond the current level
of 300 tons, as it is experiencing diseconomies of scale beyond that point. The company is currently
operating at a loss, and increasing production further will only exacerbate the losses.
To improve its short-run profitability, GreenHarvest Farms should consider the following recommen-
dations:
1. Reduce production to 300 tons: The analysis shows that the company's lowest average cost (AC) is
achieved at a production level of 300 tons. By reducing production to this level, GreenHarvest Farms
can minimize its losses and operate more efficiently in the short run.
2. Explore ways to reduce costs: The company should investigate opportunities to reduce its total costs,
such as optimizing its production processes, negotiating better prices for inputs, or implementing cost-
saving measures.
3. Increase prices: Given the growing demand for organic produce, GreenHarvest Farms could con-
sider increasing its prices to improve its profitability. However, this should be done cautiously, as it
may impact the company's competitiveness and market share.
4. Invest in capacity expansion: In the long run, the company should consider expanding its production
capacity to meet the expected increase in market demand for organic produce. This will allow Green-
Harvest Farms to take advantage of economies of scale and improve its overall profitability.
Cost & Production Analysis.
By implementing these recommendations, GreenHarvest Farms can optimize its short-run production
and cost structure, while also laying the groundwork for long-term growth and profitability.
Reference
1. Besanko, D., Braeutigam, R. R., & Gibbs, M. (2015). Microeconomics (5th ed.). John Wiley &
Sons.
2. Mankiw, N. G. (2014). Principles of Economics (7th ed.). Cengage Learning.
