Coca Cola Cost Analysis

We have got data that cokes major contents are sugar, CO2, water and a readymade flavour ( depends upon product eg coke, thumps up). A recyclable filled glass bottle selling price of Rs 10/- for 200ml will approximately cost Rs. 2.00- Rs. 2.20 including all the processes involved in production.

1) Cost incurred by a typical bottling plant of Coca-Cola is total Revenue(TR), Total Cost(TC), Profit(), the cost of capital.

2) Production and Costs: The production function, the total cost curve, fixed and variable cost, average and marginal costs, cost curves.

3) Cost in the short run and long run, average cost, economies of scale

4) Sunk Cost

• Firms, Markets and Costs: Due to the change in the market place, market condition, firms like Coca-Cola’s

b) how to produce(technology) ?

c) The price it sells at ?

The firms cost are key to its production and pricing decision.

• Revenue, Cost, Profit: Assuming the Coca-Cola’s primary goal is to maximise the profit.

 Total Revenue: The total amount received by a firm on the sale of its output.

 Total Cost: It is the total amount incurred by the firm to produce its finished goods.

Profit=TR-TC

Generally TR, TC and profit will vary with the level of output/period.

For plants/firms like Coca-Cola, TR=P. (output(y))

We will see in the graph how TC varies.

• Capital Cost as Opportunity Costs:

Total costs TC includes all opportunity costs= Explicit Cost + Implicit Cost

Implicit Cost: These are the alternative opportunities forgone, time, interest, income on capital etc.

Explicit Cost: These are the cost basically accounts measure ( the outgoings)

• Fixed and variable cost

 Fixed Cost: Costs that do not vary with the quantity of output produced.

 Variable Cost: Cost that do vary with the quantity of output produced.

In short-run costs like size-of-production and facilities are fixed, but in the longer run almost all cost are variable.

• Average and Marginal Costs

 Average Cost(AC): Average costs are the costs required to make a typical unit of

We have averaged the total number of output from the plant per minute to the number of labours present there and hence we will get the productivity of the labour

1) Coke’s MC is eventually rising

2) Coke ATC is not perfectly ‘U’ shaped

3) Coke’s ATC=MC at minimum point i.e. at approximately 5 units/min

MC and AC Curves:

• Rising Marginal curve reflects diminishing marginal product of workers (i.e. too many workers)

• U-shaped (in this case a slightly U shaped ATC=AFC+AVC

Average fixed cost will be always decreasing, whereas Average Variable curve increases because of diminishing Marginal product of workers.

• Output(Y) where MC=AC, Average total cost is minimum, i.e. this is the point of efficient sale o production.

Short Run and Long Run Average Total cost

• In the long run Average Total Cost (ATC) shows the ability of the company to invest in new fixed assets (in our case, a new bottling plant)

Thus during the long Run, variable cost becomes fixed now.

Therefore during long run Average Cost curve is more flatter ‘U’ Shaped curve than the short-run AC