Management Tools for Planning: Enterprise Budgets 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.) Annual Machine Cost Salvage Value Useful life Annual Taxes Insurance 1. Tractor $65 $150 6 yrs. 6 yrs. 2. Chisel 3. Disk $150,000 $17,600 $18,800 $19,800 $19,700 $50,000 $ 6,000 $ 7,500 $ 5,700 $ 3,800 $20 $20 $ 45 $ 45 4. Grain drill 5. Pickup 6 yrs. 6 yrs. 6 yrs. $20 $95 $ 55 $620 B. MACHINERY CALCULATIONS - AVERAGE ANNUAL FIXED COSTS (Use 8% opportunity cost for capital.) Depreciation 16,666.67 Interest 8000 Taxes 65 Insurance 150 Tractor Chisel 1933.33 1944 20 45 1883.33 1052 20 145 Disk 2350.00 (1020 20 55 Grain drill Pickup TOTALS 2650.00 940 95 1620 125483.33 11956 220 1915 Cost per acre 125.48 11.96 1.22 1.92 c. OTHER INFORMATION 1. Expected yield 2. Selling price 3. Labor cost - preharvest 4. Land rent 35.0 by 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 5. Fertilizer cost 6. Seed cost 7. Chemical cost 8. Tractor variable cost 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 preharvest 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.? e. Would you sign this lease and purchase the machinery? WHY? 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? Management Tools for Planning: Enterprise Budgets 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.) Annual Machine Cost Salvage Value Useful life Annual Taxes Insurance 1. Tractor $65 $150 6 yrs. 6 yrs. 2. Chisel 3. Disk $150,000 $17,600 $18,800 $19,800 $19,700 $50,000 $ 6,000 $ 7,500 $ 5,700 $ 3,800 $20 $20 $ 45 $ 45 4. Grain drill 5. Pickup 6 yrs. 6 yrs. 6 yrs. $20 $95 $ 55 $620 B. MACHINERY CALCULATIONS - AVERAGE ANNUAL FIXED COSTS (Use 8% opportunity cost for capital.) Depreciation 16,666.67 Interest 8000 Taxes 65 Insurance 150 Tractor Chisel 1933.33 1944 20 45 1883.33 1052 20 145 Disk 2350.00 (1020 20 55 Grain drill Pickup TOTALS 2650.00 940 95 1620 125483.33 11956 220 1915 Cost per acre 125.48 11.96 1.22 1.92 c. OTHER INFORMATION 1. Expected yield 2. Selling price 3. Labor cost - preharvest 4. Land rent 35.0 by 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 5. Fertilizer cost 6. Seed cost 7. Chemical cost 8. Tractor variable cost 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 preharvest 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.? e. Would you sign this lease and purchase the machinery? WHY? 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