Agriculture Reference
In-Depth Information
300,000
250,000
Total fixed costs
200,000
150,000
100,000
50,000
0
0
100,000 200,000 300,000 400,000 500,000 600,000
Sales volume ($)
Figure 12.1 Total fi xed costs, LCM Nursery, Inc.
At $1 million of sales, fi xed costs drop to 20 percent of sales. This fi xed cost percentage
continues to drop as long as volume is increased in the same physical plant ( Figure 12.2) .
The fact that fi xed costs as a percentage of sales falls rapidly as sales increase is extremely
important to operating effi ciency in any agribusiness. Firms often make expansion decisions
based upon this economy of scale effi ciency. As long as no additional assets are required to
farm an additional 80 acres, the farmer expands and is able to lower average fi xed cost. Of
course, this can't go on forever—at some point limits to resources force additional incre-
ments of capacity to be added, and total fi xed costs increase.
Variable costs
Variable costs, on the other hand, behave quite differently. Assume that the variable cost per
unit of sales for LCM, Inc., averages 60 percent of each dollar of sales; that is, every time a
200
175
150
125
Fixed costs as a
percentage of sales
100
75
50
25
0
0
100,000
200,000
300,000
400,000
500,000
600,000
Sales volume ($)
Figure 12.2 Average fi xed costs, LCM Nursery, Inc.
 
 
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