THE ‘COST IS RIGHT’ BREAK-EVEN ENTERPRISE ANALYISI § Section: Advanced Agribusiness § Unit: Farm Ranch Business Management
THE COST IS RIGHT Game Show
Fixed Costs • Costs that will occur regardless of the level of • 1. 2. 3. 4. production. Costs that affect the whole operation. Depreciation Interest Insurance on facilities Taxes
Variable Costs • Costs that vary according to the level of production. • These are the main costs associated with an enterprise break-even 1. 2. 3. 1. 2. 3. projection. Seed Fertilizer Fuel Feed costs a. Grain b. Hay c. Supplement Vet Labor
Know Your Costs of Production § Past financial records. § Local newspapers and trade magazines. § Professionals § Local businesses and other producers. § Use the Internet. § Use government agencies. § Use universities, colleges & extension.
Fixed and Variable Costs § Fixed costs are not directly related to the level of production. § Variable costs change in direct relation to volume of output.
What is a Break-even Analysis? § 1. Determine the selling price of a commodity or § § § product by showing you what you need to sell the item for to “break even. ” 2. Determine how much you can afford to pay for certain inputs whether it be fuel or the cost of a feeder calf. 3. Break-evens are figured on a “per unit basis for ease of analysis and so you can compare your cost of production with other producers. 4. Break-even analysis can also help a producer analyze the volume of production they should be producing at by determining at what point increasing variable cost meets total income.
§ What are the break-even prices at various yields? “ § "What are break-even yields at various input prices? "
Break-even - Graphically 1 P. H. Gutierrez, former Colorado State University Cooperative Extension farm/ranch management economist and associate professor; and N. L. Dalsted, Cooperative Extension farm/ranch management specialist and professor; agricultural and resource economics. 9/92. Reviewed 10/04. Updated Friday, June 23, 2006.
Mathematical Explanation § BE=F/ (S-V) § BE = break-even point § F = Total Fixed Costs § V = Variable Costs § S = Savings or additional returns per unit of production
§ Example 1 § A farmer wants to buy a new combine rather than hire a custom harvester. The total fixed costs for the desired combine are $21, 270 per year. The variable costs (not counting the operator's labor) are $8. 75 per hour. The farmer can harvest 5 acres per hour. The custom harvester charges $16. 00 per acre. How many acres must be harvested per year to break-even?
§ Example 2 § Break-even analysis can be easily extended to consider other changes. If the farm operator can save two additional bushels of wheat per acre more than the custom harvester, what would be the break-even point if wheat is worth $4/bushel?
§ Example 3 § A farmer raising 1, 200 acres of wheat per year considers purchasing a combine. How much additional return (to land, capital labor, management and risk) would result?
Feeder Calf Break-even § Break-even Yield = Total Costs divided by Total Production: ie. Yield, lbs, bushels, acres. § Break-even Sale Price = Total Costs divided by Sale Price: ie. futures price, forward contract, last year’s price.
Summary § Determines at what level of production your costs and income are equal. § It shows the relationship between costs, volume of production and income. § It shows the relationship between fixed costs and variable costs and how they affect the break-even point. § Break-even is reached when total receipts equals total costs.
§ Analyze one product at a time on a per unit basis. § Variable and fixed costs should be classified by each individual producer according to their operation. § Don’t over-use a break-even. § Develop spreadsheets. § Use break-even analyses with partial budgeting and enterprise budgeting. § you can determine quickly the lowest amount of business activity need to prevent losses.
QUIZ TIME
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