Ag Business Management Final

Production Management

The planning, organizing, and controlling of production activities to efficiently transform inputs into outputs.

Fixed Costs

Costs that do not change with the level of output in the short run (e.g., insurance, depreciation, salaries).

Variable Costs

Costs that change directly with the level of production (e.g., feed, fuel, labor wages, supplies).

Total Costs

The sum of fixed and variable costs at a given level of output.

Contribution

Selling price per unit minus variable cost per unit; the amount available to cover fixed costs and profit.

Contribution – Interpretation

Shows how much each unit contributes toward covering fixed costs and generating profit.

Contribution Margin

The percentage of each sales dollar available to cover fixed costs and profit.

Using Contribution Margin to Price a New Product

Helps determine a price that covers variable costs and provides the desired profit contribution.

Break-Even Quantity (BEQ)

The number of units required to sell in order to cover all fixed costs.

Break-Even Quantity – Interpretation

Shows how many units must be sold before profit begins.

Break-Even Sales

The dollar amount of total sales needed to cover all fixed costs.

Ordering Costs

Costs associated with placing and receiving inventory orders, such as paperwork, shipping, and administrative time.

Carrying Costs

Costs associated with holding inventory, such as insurance, interest, spoilage, and storage.

Economic Order Quantity (EOQ) – Interpretation

Identifies the most efficient order size that minimizes total inventory costs.

Reorder Point (ROP) – Interpretation

Ensures inventory is reordered in time so the business does not run out before new orders arrive.

Balance Sheet

A financial statement showing assets, liabilities, and owner’s equity at a specific point in time.

Assets

Resources owned by the business (cash, equipment, buildings, livestock, inventory).

Liquid Assets

Assets easily converted into cash (cash, checking, savings).

Fixed Assets

Long-term assets not easily converted to cash (land, buildings, machinery).

Liabilities

Debts or obligations the business owes.

Current Liabilities

Debts due within one year (short-term loans, accounts payable)

Long-Term Liabilities

Debts owed longer than one year (mortgages, equipment loans).

Owner’s Equity

The owner’s claim on assets after liabilities; represents net worth.

Solvent

When total assets exceed total liabilities; positive equity.

Insolvent

When total liabilities exceed total assets; negative equity.

Accounting Period

The specific period covered by financial statements (monthly, quarterly, yearly).

Profit and Loss Statement (Income Statement)

Shows revenues, expenses, and profit over a specific period

Revenue

Total money earned from sales of goods or services.

Cost of Goods Sold (COGS)

Direct costs associated with producing goods (feed, inputs, livestock purchased).

Operating Expenses

General business expenses not directly tied to production (utilities, repairs, salaries).

Gross Margin

Revenue minus cost of goods sold

Profit

Revenue minus all expenses.

Net Profit

Profit after subtracting all expenses, interest, and taxes.

Comparative Analysis

Analyzing multiple periods of financial statements to identify trends and evaluate performance.

Working Capital

The difference between current assets and current liabilities.

Working Capital – Interpretation

Measures short-term financial health and the ability to meet obligations.

Capital Good

A long-term asset used in production, such as equipment, buildings, or machinery.

Time Value of Money

The idea that money today is worth more than the same amount in the future due to earning potential.

4 Criteria of a Good Capital Investment

Definition:

1. Provides positive long-term net profits

2. Provides the highest long-run net profit among alternatives

3. Provides benefits sooner rather than later

4. Has the lowest risk

Methods That Consider Time Value of Money

Net Present Value (NPV), Benefit/Cost Ratio (B/C Ratio), Internal Rate of Return (IRR).

Methods That Do Not Consider Time Value of Money

Payback Period and Average Rate of Return (ARR).

Payback Method

Measures how long it takes for an investment to recover its initial cost.

Payback Method – Interpretation

Shorter payback periods imply lower risk.

Payback Method – Violation

Ignores time value of money and long-term profitability

Average Rate of Return

Measures the average annual profitability of an investment compared to its cost.

ARR – Interpretation

Higher ARR means a more profitable investment.

Violation

Ignores timing of cash flows and therefore the time value of money.

Net Present Value (NPV)

A method comparing the present value of benefits to the present value of costs to determine investment profitability.

NPV – Interpretation

If NPV > 0, the project adds value and should be accepted.

Benefit/Cost Ratio (B/C Ratio)

Measures the value received for every dollar invested.

B/C Ratio – Interpretation

If the ratio is > 1, the investment is financially sound.

Internal Rate of Return (IRR)

The discount rate at which NPV equals zero.

IRR – Interpretation

If IRR exceeds the required return, the project is acceptable.