- - AGRICULTURAL CORE CURRICULUM - - (CLF1000) Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT (CLF1350) Unit Title: Financial Planning and Analysis ____________________________________________________________________________ (CLF1353) Topic: ENTERPRISE ANALYSIS Time Years 2 Hours 3 / 4 ____________________________________________________________________________ Topic Objectives: Upon completion of this lesson, the student will be able to: Learning Outcome #: (J-1) - Describe the purposes of enterprise records. (H-4) - Distinguish between fixed and operating costs. (H-5) - Demonstrate the ability to complete an enterprise budget for an agribusiness. (*-*) - Perform a break-even analysis for comparing enterprises. Special Materials and Equipment: Copies of the budget page from the California Vocational Agriculture Record Book and California Cooperative Extension crop and livestock budgets (available from Cooperative Extension) References: Luening, R. A., Klemme, R. M., & Mortenson, W. P. (1991). THE FARM MANAGEMENT HANDBOOK (7th ed.). Danville, IL: Interstate Publishers. Resources: California State Dept. of Education, Career Vocational Education Unit, Agriculture Education Program. (1989). CALIFORNIA VOCATIONAL AGRICULTURE RECORD BOOK & MANUAL [2 separate items]. Available from: Tom Munter, Asst. State FFA Advisor, California State Dept. of Education, P.O. Box 944272, Sacramento, CA 94244-2720 Phone: (916) 445-4972 & Fax: (916) 322-5429 Deere & Company. (1987). FARM AND RANCH BUSINESS MANAGEMENT (2nd ed.). Available from: John Deere Technical Services, Department F, John Deere Rd., Moline, IL 61265. Evaluation: Unit quiz by instructor, activity assignments TOPIC PRESENTATION: ENTERPRISE ANALYSIS A. The budget is the primary decisionmaking tool of the business manager, comparing costs to returns for different business activities. There are two types of costs to be considered in deciding what activities to undertake: 1. Fixed costs are costs that occur no matter what product is produced. Examples of fixed costs are the costs of existing land, buildings, equipment, and related debt. 2. Variable costs are expenses related to the production of a particular crop or livestock species. Examples of variable costs are the costs of feed, fertilizer, seed, labor, and fuel. 3. In the short run, fixed costs cannot be changed. Improving the return on variable costs is the best way to improve the efficiency and thereby the profitability of the business in the short term. B. An enterprise budget is used to etimate the returns to a particular business activity. An enterprise budget allows a manager to: 1. Compare one crop or product to another as an aid in deciding which one to produce. 2. An enterprise budget also allows a manager to determine the most efficient way to allocate resources. Four decisons are generally considered when seeking to cut costs or increase returns: a. Expanding an enterprise b. Changing to an alternative enterprise c. Changing the way resources are spent on two or more competing enterprises d. Changing production practices C. When considering changes in business practices, the manager must compare the effects of changing inputs on returns. 1. A change in practices can: a. Eliminate or reduce some costs b. Eliminate or reduce some returns c. Cause additional costs to be incurred d. Cause additional revenues to be received 2. When considering alternate enterprises, one can simply compare the net income generated by one enterprise with the net income generated by another. 3. When considering expansion of an enterprise, some thought should be given to whether starting an additional enterprise would be a more profitable use of capital. 4. When proposed changes in practices affect both the costs and income associated with more than one enterprise, the net effect of the change should be determined. This is given by the following formula: (Reduction in Costs + Increased Income) minus (Increased Costs + Reduction in Income) ---------------------------------------- Net Effect of the Proposed Change ============================================================================== *** INSTRUCTORS PLEASE NOTE *** An example analysis of this type is presented on pages 4-17 through 4-19 of Deere's FARM AND RANCH BUSINESS MANAGEMENT. ============================================================================== D. A break-even analysis is often used when comparing competing enterprises. This analysis determines the price which would have to be received for the income from the enterprise to cover all costs. To determine the break-even price: 1. Determine the cost of production and the amount of product which will be produced. 2. Divide the cost of production by the number of units produced. This gives the cost per unit. In order to break even, the price paid to the producer must equal the cost of production. 3. The producer can compare the break-even prices of different products with the price the products are likely to bring in order to determine the likelihood of making profits on each enterprise. ============================================================================= *** INSTRUCTORS PLEASE NOTE *** An example break-even analysis is presented on pages 4-10 through 4-14 of Deere's FARM AND RANCH BUSINESS MANAGEMENT. ============================================================================= __________________________________________________________ ACTIVITY: 1. Compare different projects conducted by students as part of their supervised occupational experience projects. How do various enterprises differ in terms of their costs and returns? Have students estimate the amount of time they spent on their projects. How does the return to their labor compare with the amount they could earn on a job? How much would they have to receive for their project products in order to earn as much from them as they would working at a job for the same number of hours. __________________________________________________________ 11/11/91 EEZ/JA/ch #%&C