Agriculture Reference
In-Depth Information
dollars per bushel or as a percent of sales. The physical unit measure is acceptable for a fi rm
that sells product in one physical size—a fertilizer fi rm sells only fertilizer and prices it by
the ton. However, most agribusinesses sell a variety of products in several different physical
units. Thus, tracking variable cost as a percent of sales is usually the best option. Totals for
BF&G example are included in
Table 12.2.
The fi xed-variable cost summary shows that BF&G committed itself to a cost of $1,149,722
the day it opened its doors for business. Additionally, every time it sold a dollar's worth
of product, it incurred, on average, an incremental or additional cost of 89.64 cents.
Step 3: calculate the contribution to overhead
CTO (contribution to overhead)
is the heart of volume-cost analysis and an important
fi gure for many management decisions. It shows the portion of each unit of sales that remains
after variable costs are covered and that can be applied toward paying or covering fi xed or
overhead costs. Each time a unit of product is sold, the variable costs must be covered fi rst.
Anything that remains makes a contribution to overhead.
In this example, $1 of sales, of course, generates $1 of revenue. Of this $1 of revenue,
89.64 cents must go to cover variable costs. This leaves $1.00 - $0.8964 = $0.1036 as a
contribution to overhead for each $1 of sales.
Revenue (Sales) $1.000
Less: Variable Cost - 0.8964
Contribution to Overhead
$0.1036
Table 12.2
Classifi cation of fi xed and variable costs for Brookstone Feed
and Grain company
Expense
Fixed Cost
(dollars)
Variable Cost
(percent of sales)
Cost of Goods Sold
87.43
Salaries and Benefi ts
210,000
Full-time Wages
166,000
Part-time Wages
5,200
0.04
Commissions
0.32
Depreciation
290,000
Maintenance and Repairs
29,000
0.22
Utilities
38,012
0.14
Insurance
71,200
Offi ce Supplies/Expense
13,410
0.10
Advertising/Promotion
6,400
Gas and Oil
24,300
0.18
Delivery and Freight
1.17
Rent
6,300
Taxes, Licenses, Fees
48,160
Miscellaneous
0.02
Payroll Tax
10,900
Bad Debt
0.02
Interest
230,840
TOTAL
1,149,722
89.64
