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. A MACHINERY NEEDED (Use only for the 1,000 acres of wheat.) Annual Machine Cost Salvage Value Useful life Annual Taxes $65 Insurance $150 $ 45 $20 1. Tractor 2. Chisel 3. Disk 4. Grain drill 5. Pickup $150,000 $17,600 $18,800 $19,800 $19,700 $50,000 $6,000 $7,500 $ 5,700 $3,800 6 yrs. 6 yrs. 6 yrs. 6 yrs. 6 yrs. $20 $ 45 $20 $95 $ 55 $620 B. MACHINERY CALCULATIONS - AVERAGE ANNUAL FIXED COSTS (Use 8% opportunity cost for capital.) Taxes Insurance Depreciation 16,666.66 1933.33 Interest 8000.00 Tractor Chisel 944.00 150.00 45.00 45.00 1883.33 Disk Grain drill 65.00 20.00 20.00 20.00 95.00 1052.00 1020.00 2350.00 55.00 620.00 Pickup 2650.00 940.00 TOTALS 25843.33 11956.00 11.96 220.00 0.22 915.00 0.92 Cost per acre 25.48 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 35.0 bu per acre $ 3.25 per bu $ 7.80 per acre $27.50 per acre $16.50 per acre $15.00 per acre $ 8.75 per acre 8. Tractor variable cost $8.20 per acre 9. Variable cost on other mach & equip. $ 3.65 per acre 10. Custom harvesting, hauling, etc. $18.00 per acre 11. Compute interest on total preharvest costs @ 8% for 6 months. Use the information above and your machinery calculations to complete the enterprise budget on the next page, then answer the following questions. With yield of 35 bu. per acre, what is the break-even selling price? Ans.__4.95 2. If the selling price was only $2.85 per bu., what per acre yield would be necessary to break- even? Ans. 49.56 3. If the expected yield was only 30 bu. per acre, what selling price would be required to just break-even on the operation? Ans. 4. According to your budget, what is the Cost of Production per bu.? Ans. 4.25 5. Would you sign this lease and purchase the machinery? WHY? No, cannot cover all costs If you had already signed the lease and purchased the machinery, how low must the price of wheat fall before you should stop production? Ans._ 2.62 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. A MACHINERY NEEDED (Use only for the 1,000 acres of wheat.) Annual Machine Cost Salvage Value Useful life Annual Taxes $65 Insurance $150 $ 45 $20 1. Tractor 2. Chisel 3. Disk 4. Grain drill 5. Pickup $150,000 $17,600 $18,800 $19,800 $19,700 $50,000 $6,000 $7,500 $ 5,700 $3,800 6 yrs. 6 yrs. 6 yrs. 6 yrs. 6 yrs. $20 $ 45 $20 $95 $ 55 $620 B. MACHINERY CALCULATIONS - AVERAGE ANNUAL FIXED COSTS (Use 8% opportunity cost for capital.) Taxes Insurance Depreciation 16,666.66 1933.33 Interest 8000.00 Tractor Chisel 944.00 150.00 45.00 45.00 1883.33 Disk Grain drill 65.00 20.00 20.00 20.00 95.00 1052.00 1020.00 2350.00 55.00 620.00 Pickup 2650.00 940.00 TOTALS 25843.33 11956.00 11.96 220.00 0.22 915.00 0.92 Cost per acre 25.48 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 35.0 bu per acre $ 3.25 per bu $ 7.80 per acre $27.50 per acre $16.50 per acre $15.00 per acre $ 8.75 per acre 8. Tractor variable cost $8.20 per acre 9. Variable cost on other mach & equip. $ 3.65 per acre 10. Custom harvesting, hauling, etc. $18.00 per acre 11. Compute interest on total preharvest costs @ 8% for 6 months. Use the information above and your machinery calculations to complete the enterprise budget on the next page, then answer the following questions. With yield of 35 bu. per acre, what is the break-even selling price? Ans.__4.95 2. If the selling price was only $2.85 per bu., what per acre yield would be necessary to break- even? Ans. 49.56 3. If the expected yield was only 30 bu. per acre, what selling price would be required to just break-even on the operation? Ans. 4. According to your budget, what is the Cost of Production per bu.? Ans. 4.25 5. Would you sign this lease and purchase the machinery? WHY? No, cannot cover all costs If you had already signed the lease and purchased the machinery, how low must the price of wheat fall before you should stop production? Ans._ 2.62