Agriculture Reference
In-Depth Information
14000
Total revenue
Breakeven point
12000
10000
8000
Total costs
6000
Total variable costs
4000
Total fixed costs
2000
0
1000
3000
5000
7000
9000
11000
13000
Sales volume ($1000)
Figure 12.7
Volume-cost relationships for Brookstone Feed and Grain company
and total costs at a specifi c volume level.) The impact of almost any cost or price change can
be shown by simply including the change and observing the resulting effect on profi ts.
One of the best features of volume-cost analysis is its simplicity and its applicability
to real-world situations. Any manager with an income statement and an understanding
of fi xed and variable cost concepts can estimate the impact of various decision alternatives
on profi t levels. Although the categorizing of fi xed and variable costs may not be perfect,
experience has shown that a good approximation can be made and will be useful. And the
conclusions are fairly accurate, so long as the proper defi nitions of fi xed and variable costs
are used.
Summary
Decision-making is one of the primary responsibilities of agribusiness managers. Professional
managers approach this activity in a systematic way—identifying the problem, summarizing
facts, identifying and analyzing alternatives, taking action, and evaluating results. Their
analysis often uses a wide variety of analytic tools to facilitate this entire process.
Volume-cost analysis is one of the more powerful tools used by agribusiness managers.
By separating fi xed costs (those not related to volume of business) from variable costs (those
directly related to volume), managers can study the impact of a variety of cost and price
changes on their profi t and determine the amount of business necessary to break even. They
can even project the amount of business necessary to reach a certain profi t level.
Volume-cost analysis helps managers and owners of agribusiness fi rms determine the
impact of a variety of important decisions to the fi rm. Should a salesperson be added, can we
afford to cut selling price, and what happens if we can reduce our input costs? Those inter-
ested in applying volume-cost analysis to a particular fi rm should note that variable costs for
agribusinesses can vary dramatically—from less than 50 percent to 90 percent or more. The
BF&G example provides an example with a relatively low contribution to overhead (CTO).
There is a good reason for this. About 61 percent of BF&G's volume is from grain sales.
