cost & return analysis
Post on 31-Dec-2015
27 Views
Preview:
DESCRIPTION
TRANSCRIPT
Cost & Return AnalysisAg Management
Ch 5
Objectives
Describe inputs and outputs Explain the principle of diminishing returns Describe the 3 stages of the production
function Describe the amount of inputs that will return
the maximum profit Determine the opportunity cost
Input-Output Relationships
Inputs
Materials that determine fixed and variable costs
Outputs
The different results of varying the amount of input used in production
Relationship of Inputs & Outputs
The basic relationship that allows analysis of an input and an output is called a production function
See Example p. 5-2 to 5-4
Principle of Diminishing Returns
As an input is added in production, the output will increase at an increasing rate then at a decreasing rate and finally decline
Fig 1 p. 5-4
3 Ways of Measuring Production
Total Product (TP)› The production (output) that can be achieved with the
various levels of input.› Example: We apply one unit of fertilizer and we get an
amount of output, when plotted this gives the TP curve.
Average Product (AP)› Total Product/Amount of Input
Marginal Product (MP)› Change in total product for a change in input
Examples- Table 2 Columns 1-4 p. 5-5
3 Stages of Production Function
1. An increasing average return for each added unit of input.
› Average product (AP)= Total Yield (TP)/ the Number of Units of the Variable Input
2. Begins when Marginal Product (MP)=Average Product (AP)
› Diminishing returns begin to develop in Stage 2
3. Begins when Marginal Product (MP) becomes 0.› In this stage the total product actually decreases if
the input increases.
Profit Maximizing Rule
Maximum profit will be obtained if you add the variable input to the point where the value of the marginal product (VMP) equals the price of the added input
VMP=Price of Input VMP is found by multiplying Marginal
Product (MP) by the price of the product› MP x Price of Product= VMP
Opportunity Costs
The cost of using a resource one way based on the return that could be obtained from using it in the best alternative way.
Example: p. 5-6
Input-Input Relationship
Why Input-Input Relationships are Used
Inputs have individual and combined impacts on the final product
Methods of Determining Least Cost Ration Formula
Graphics Mathematical p. 5-9
“Same Production” Line
Used in the graphical least cost ration method
Occurs when all points are connected into a line segment
Fig 4 p. 5-9—the line shows the combination of soybean oil meal and corn for 100 pounds of gain for 60 lb hogs
“Same Cost” Line
Take a given amount of money and divide by the cost per pound of a feedstuff to get the quantity of feed that amount of money will purchase. Do the same for other feedstuffs, connect points A and B and this is the same cost line
See p. 5-9 , 5-10 (fig 6)
Least Cost Ration
Found by moving the same cost line parallel to itself until it touches the same production line at one point only.
Point C fig 6 p. 5-10 Mathematical Formula
Change in Feed A/Change in Feed B= Price of Feed B/Price of Feed A
Math Method Steps
1. Determine the rate that one input substitutes for another. This is the marginal rate of substitution.
2. Compute the price ration. This should be the price at the point of use.
3. Find the ration for which the two rations are equal. This is the least-cost combination of the two inputs.
Break-Even Analysis
Can provide price and/or yield targets that can be beneficial in planning
Risk Management Analysis
When used in enterprise budgets can be useful when completing the financial analysis
Table 3/Table C---Crop Insurance
Summary & Assignment*
Summary p. 5-12 Assignment complete review questions 1-9.
top related