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Figure 1 shows the distribution of the revenue received from the sale of a Starbucks cappuccino drink priced at £2.27 in 2015 - Edexcel - A-Level Economics A - Question 5 - 2017 - Paper 1
Question 5
Figure 1 shows the distribution of the revenue received from the sale of a Starbucks cappuccino drink priced at £2.27 in 2015. **Figure 1** (Source: adapted from A... show full transcript
Worked Solution & Example Answer:Figure 1 shows the distribution of the revenue received from the sale of a Starbucks cappuccino drink priced at £2.27 in 2015 - Edexcel - A-Level Economics A - Question 5 - 2017 - Paper 1
Step 1
Which one of the following is a fixed cost to Starbucks?
Answer
To determine which option represents a fixed cost to Starbucks, we must understand the definitions of fixed and variable costs. In this context, the fixed cost is an expense that does not change regardless of the volume of goods or services produced.
- A. Coffee - This is a variable cost since it changes depending on the number of drinks sold.
- B. Milk - This is also a variable cost for the same reason.
- C. Packaging - Similarly, this is a variable cost as it varies with production levels.
- D. Rent - This is a fixed cost because it remains the same regardless of the sales volume.
Thus, the correct answer is D. Rent.
Step 2
Explain the difference between fixed costs and variable costs.
Answer
Fixed costs are expenses that do not vary with the level of production or sales activity. They must be paid regardless of the quantity produced and typically include rents, salaries, and insurance. For instance, the rent for a Starbucks location is fixed and does not change with the number of cappuccinos sold.
On the other hand, variable costs fluctuate with production levels. They increase as production increases and decrease when production declines. Examples of variable costs for Starbucks include raw materials like coffee and milk, which depend on the quantity of drinks sold. In summary, fixed costs remain constant, while variable costs vary with production output.
Step 3
With reference to Figure 1, calculate the profit (in pence) for a cappuccino drink.
Answer
To find the profit from the cappuccino drink priced at £2.27, we first need to analyze the cost distribution from Figure 1:
- Total costs (excluding profit): 4% (Coffee) + 4% (Milk) + 8% (Packaging) + 15% (Rent) + 15% (Admin/overheads) + 24% (Labour) + 17% (VAT) = 87%
This indicates that 87% of the price is spent on costs. Hence, the profit percentage can be calculated as follows:
- Profit Percentage = 100% - 87% = 13%
Now calculating the profit:
- Profit = 13% of £2.27 = 0.13 × 2.27 = £0.2951 (approximately)
To convert this into pence, we multiply by 100:
- Profit in pence = £0.2951 × 100 ≈ 29.51 pence.
Thus, the profit for a cappuccino drink is approximately 30 pence (rounded up).