1. Assume you have a chance to rent 1,000 acres of cropland for 6 years. You can raise only wheat. Your problem is to develop an enterprise budget to see if this venture will be profitable before you sign the lease and purchase the necessary machinery. Use the information in sub-sections A, B, and C below to construct your enterprise budget. Use the attached wheat enterprise budget form. Note: You need to make you machinery calculations in B to be able to complete the enterprise budget. A. MACHINERY NEEDED (Use only for the 1,000 acres of wheat.) Machine Cost 1. Tractor 2. Chisel 3. Disk 4. Grain drill 5. Pickup $150,000 $17,600 $18,800 $19,800 $19,700 Salvage Value Useful life Annual Taxes $50,000 6 yrs. $65 $ 6,000 6 yrs. $20 $ 7,500 6 yrs. $20 $ 5,700 6 yrs. $20 $ 3,800 6 yrs. $95 Annual Insurance $150 $ 45 $ 45 $ 55 $620 B. MACHINERY CALCULATIONS - AVERAGE ANNUAL FIXED COSTS (Use 8% opportunity cost for capital.) Depreciation Interest Taxes Insurance Tractor Chisel Disk Grain drill Pickup TOTALS Cost per acre e Would you sign this lease and purchase the machinery? WHY? C. OTHER INFORMATION 1. Expected yield 2. Selling price 3. Labor cost - preharvest 4. Land rent 5. Fertilizer cost 6. Seed cost 7. Chemical cost 8. Tractor variable cost 35.0 bu per acre $5.25 per bu $ 9,80 per acre $47.50 per acre $26.50 per acre $25.00 per acre $ 12.75 per acre $13.20 per acre f. If you had already signed the lease and purchased the machinery, how low must the price of wheat fall before you should stop production? 9. Variable cost on other mach. & equip. $5.65 per acre 10. Custom harvesting, hauling, etc. $25.00 per acre 11. Compute interest on total prebarvest variable costs (rate at 3%/year) for one year. Based on the enterprise budget you constructed, answer the following questions (please show calculations): a. With yield of 35 bu, per acre, what is the break-even selling price? b. If the selling price was only $4.85 per bu., what per acre yield would be necessary to break-even? c. If the expected yield was only 30 bu, per acre, what selling price would be required to just break- even on the operation? d. According to your budget, what is the Cost of Production per bu? Wheat Enterprise Budget (one acre) [for Question 1] Unit REVENUE Price Oly Total TOTAL REVENUE VARIABLE COSTS Pre-Harvest Variable Costs: Al Harvest Variable Casts: TOTAL VARIABLE COSTS INCOME ABOVE VARIABLE COSTS FIXED/OWNERSHIP COSTS TOTAL FIXED COST TOTAL COSTS PROFIT Net return to management 1. Assume you have a chance to rent 1,000 acres of cropland for 6 years. You can raise only wheat. Your problem is to develop an enterprise budget to see if this venture will be profitable before you sign the lease and purchase the necessary machinery. Use the information in sub-sections A, B, and C below to construct your enterprise budget. Use the attached wheat enterprise budget form. Note: You need to make you machinery calculations in B to be able to complete the enterprise budget. A. MACHINERY NEEDED (Use only for the 1,000 acres of wheat.) Machine Cost 1. Tractor 2. Chisel 3. Disk 4. Grain drill 5. Pickup $150,000 $17,600 $18,800 $19,800 $19,700 Salvage Value Useful life Annual Taxes $50,000 6 yrs. $65 $ 6,000 6 yrs. $20 $ 7,500 6 yrs. $20 $ 5,700 6 yrs. $20 $ 3,800 6 yrs. $95 Annual Insurance $150 $ 45 $ 45 $ 55 $620 B. MACHINERY CALCULATIONS - AVERAGE ANNUAL FIXED COSTS (Use 8% opportunity cost for capital.) Depreciation Interest Taxes Insurance Tractor Chisel Disk Grain drill Pickup TOTALS Cost per acre e Would you sign this lease and purchase the machinery? WHY? C. OTHER INFORMATION 1. Expected yield 2. Selling price 3. Labor cost - preharvest 4. Land rent 5. Fertilizer cost 6. Seed cost 7. Chemical cost 8. Tractor variable cost 35.0 bu per acre $5.25 per bu $ 9,80 per acre $47.50 per acre $26.50 per acre $25.00 per acre $ 12.75 per acre $13.20 per acre f. If you had already signed the lease and purchased the machinery, how low must the price of wheat fall before you should stop production? 9. Variable cost on other mach. & equip. $5.65 per acre 10. Custom harvesting, hauling, etc. $25.00 per acre 11. Compute interest on total prebarvest variable costs (rate at 3%/year) for one year. Based on the enterprise budget you constructed, answer the following questions (please show calculations): a. With yield of 35 bu, per acre, what is the break-even selling price? b. If the selling price was only $4.85 per bu., what per acre yield would be necessary to break-even? c. If the expected yield was only 30 bu, per acre, what selling price would be required to just break- even on the operation? d. According to your budget, what is the Cost of Production per bu? Wheat Enterprise Budget (one acre) [for Question 1] Unit REVENUE Price Oly Total TOTAL REVENUE VARIABLE COSTS Pre-Harvest Variable Costs: Al Harvest Variable Casts: TOTAL VARIABLE COSTS INCOME ABOVE VARIABLE COSTS FIXED/OWNERSHIP COSTS TOTAL FIXED COST TOTAL COSTS PROFIT Net return to management
