CSR 5003 Module 4 Cost and Burden Analysis Example

Two Cents a Bar: Pricing a Chocolate Maker's Child Labor Program and Deciding Who Should Pay for It

Student Name

American College of Education

CSR5003: Principles and Practices of Corporate Social Responsibility

Module 4 Assignment

Instructor Name

July 24, 2028

What Is Being Priced

Module 3 recommended that Marrow Creek, the invented confectioner whose cocoa this course has been tracing, require its two cocoa traders to disclose supplying cooperatives, report on household monitoring for child labor and supply at least 30 percent of its cocoa under a segregated model. The traders will not provide these for free. This paper prices the program at the 30 percent level, about 5,400 of the company's 18,000 tonnes of annual cocoa purchases, and then decides how its cost should be shared. Every responsibility decision has a price, and the price has to land on someone.

The Cost, Line by Line

Four elements make up the cost. First, the segregation premium: keeping program cocoa separate from origin to grinding adds handling, storage and logistics cost, which the traders quote at about $120 per tonne, or $648,000 a year for 5,400 tonnes. Second, household monitoring: at typical yields, 5,400 tonnes comes from roughly 3,600 farms. The traders' monitoring systems, in which community facilitators visit households, identify children in hazardous work and record follow-up, cost about $80 per household per year, or $288,000. Third, remediation: the survey evidence on prevalence in cocoa-growing households suggests that a substantial share of these households will have at least one child in child labor (NORC at the University of Chicago, 2020). The program budgets for about 1,000 children a year receiving remediation such as school supplies, birth registration or support for a household income activity, at an average of $150 each, or $150,000. Fourth, independent verification of the traders' reporting costs about $90,000 a year.

The total is about $1.18 million a year. The estimate is uncertain in both directions: monitoring may find more children than budgeted, and segregation premiums vary with harvest conditions. The company should expect the true figure to fall within 25 percent of the estimate in the first two years.

Three Ways to See the Number

Per unit, the program is small. Marrow Creek sells the equivalent of about 60 million standard bars a year, so the cost is about two cents per bar, on products that retail for $2.50 to $4.00. Against profit, it is larger: the company's operating profit is about $33.6 million, and the program would reduce it by about 3.5 percent. Against the cost of inaction, it is modest. The retailer that set the requirement accounts for about 22 percent of Marrow Creek's sales, about $92 million, contributing roughly $25 million a year after variable costs. Losing even part of that business would cost far more than the program.

The European market adds a second risk. The deforestation regulation requires plot-level traceability for cocoa sold into Europe, about 12 percent of sales. The segregated and traceable supply the program builds would largely meet that requirement too, so part of the cost is compliance spending the company would face anyway.

What the Company Gets Back

The program is not only a cost. Three returns can be estimated, though less precisely than the costs. The first is the protected revenue from the retailer, discussed above, which is the most concrete. The second is readiness for the European deforestation rules, which would otherwise require a separate traceability effort for the 12 percent of sales made in Europe; the traders estimate that a stand-alone compliance program for that volume would cost about $250,000 a year, much of which the segregated supply makes unnecessary. The third is harder to value: a reputation for knowing its supply chain, which matters to retailers choosing among suppliers and to employees and future hires.

Research on sustainability and financial performance supports focusing spending where it is material. Khan et al. (2016) found that firms performing well on sustainability issues material to their industry outperformed those performing poorly on them, while spending on immaterial issues did not show the same benefit. For a chocolate maker, human rights and deforestation in cocoa are among the most material issues it has, which is the strongest argument that this program is an investment rather than a donation. The paper does not claim that the returns exceed the cost in the first years; it claims that the program is the right use of money the company would otherwise have to spend less effectively on compliance and customer retention.

Who Could Bear the Cost

Five parties could bear the cost. Shareholders could absorb it through lower profit. Consumers could pay through higher prices. The retailer could share it through a higher purchase price or a co-funded program. The traders could absorb part through lower margins or by counting Marrow Creek's volume toward programs they run anyway. And farmers could bear it, which is what happens by default when buyers pass costs down the chain through lower prices or when monitoring becomes an unpaid obligation on cooperatives.

Consumers' willingness to pay is often overstated. In a meta-analysis of studies on willingness to pay for socially responsible products, Tully and Winer (2014) found an average stated premium of about 17 percent, with higher premiums when the beneficiaries are people, such as workers, rather than the environment. Stated willingness is not the same as behavior at the shelf, and Marrow Creek's retailer has signaled that it will not accept a list-price increase in the current year. A two-cent increase is still plausible over time, but it cannot be the whole answer now.

Who Must Not Bear It

The one party that must not bear the cost is the farming household. Child labor in cocoa is closely tied to household poverty; a program funded by lower prices to farmers, or by requiring cooperatives to run monitoring without payment, would worsen the conditions that cause the problem. The purchasing contracts will therefore state that program costs are paid in addition to, not deducted from, the prices and premiums paid to cooperatives, and the independent verifier will check that the traders pass through the agreed premiums.

The Recommended Split

The paper recommends that shareholders bear about half of the cost in the first two years, roughly $590,000 a year, accepting a reduction in operating profit of about 1.8 percent as the price of keeping the company's largest customer and meeting European requirements. The retailer should be asked to co-fund about a quarter, around $295,000, in exchange for the right to communicate the program to its own customers and access to the verified results. The traders should absorb the remaining quarter by counting Marrow Creek's volumes toward their existing program commitments and reducing their segregation premium in return for a three-year contract. From the third year, Marrow Creek should raise prices by one to two cents per bar on its premium lines, shifting part of the shareholder share to consumers as the program's results become verifiable and communicable. The split is a negotiation, not a formula, but its principles are fixed: those who profit from the cocoa share the cost, and the families who grow it do not pay for their own protection.

References

Khan, M., Serafeim, G., & Yoon, A. (2016). Corporate sustainability: First evidence on materiality. The Accounting Review, 91(6), 1697-1724. https://doi.org/10.2308/accr-51383

NORC at the University of Chicago. (2020). NORC final report: Assessing progress in reducing child labor in cocoa producing areas of Côte d'Ivoire and Ghana.

Tully, S. M., & Winer, R. S. (2014). The role of the beneficiary in willingness to pay for socially responsible products: A meta-analysis. Journal of Retailing, 90(2), 255-274. https://doi.org/10.1016/j.jretai.2014.03.004