Agriculture Reference
In-Depth Information
would have to be added to new purchases of $11,425,000 to equal the total cost of goods sold
of $11,725,000 (b). The formula is:
Beginning inventory
$2,800,000
− Ending i nventory
− 2,500,000
Net inventory change 300,000
+ Purchases
+ 1 1,425,000
= Costs of goods sold
$11,725,000
In addition, if BF&G paid any freight or transportation expense in receiving inventory at
their facility, this expense would also be included as part of cost of goods sold.
Gross margin (gross profi t) (c)
Gross margin
or
gross profi t
represents the difference between net sales and total cost of
goods sold. The gross margin is the money that is available to cover the operating expenses
and the interest expense and still leave a profi t. If the gross margin is not large enough to
cover operating expenses and the interest expense of the business, losses, and not profi ts,
will be the result. Note in the example that this account is actually labeled as “gross profi t.”
Since service income revenue has been included under the net sales fi gure, BF&G utilizes gross
profi t to refl ect gross margin from the fi ve product lines plus all service income revenue.
Gross margins are particularly important to retail agribusinesses because such businesses
have relatively little control over cost of goods sold. The prices of goods an agribusiness
purchase are critical factors that affect its gross margin. Different products usually have dif-
ferent individual gross margins, so the total gross margin for the business will also depend
on the particular combination or mix of products and their sources. Often management can
affect the cost of goods sold through careful purchasing. BF&G has a gross margin of
$1,685,000, which is enough to cover its expenses and still leave a profi t.
To demonstrate the importance of pricing decisions on gross margin and bottom line
profi t, let us assume that BF&G was able to raise its price by 1 percent on current net sales
of $13,410,000. This would have increased net sales to $13,544,100. With the cost of goods
sold remaining constant, gross profi t would have increased to $1,819,100; but after operating
expenses have been subtracted, net operating income would have increased by 28.6 percent
to $603,290, and net income before tax would have increased by over 52 percent. The same
kind of effect on the bottom line would be seen if the cost of purchased fertilizer or seed (cost
of goods sold) were reduced slightly. This effect illustrates the fact that business success is
largely centered on relatively small but important changes, and illustrates the tremendous
importance of using relevant fi nancial data to explore such changes. (These kinds of changes
and their analysis are explored further in
Chapter 12
.)
Operating expenses (d)
Operating expenses
represent the costs that are associated with the specifi c sales transacted
during the time period designated on the income statement. It is easier to interpret these
expenses if they have been divided into major divisions such as:
Marketing expenses, including:
Sales, wages, salaries, and commissions
