Agriculture Reference
In-Depth Information
This is a business that operates with very thin margins and makes money on turnover.
Alternatively, if our example fi rm had been a seed business, CTO would have been higher.
It is important to know the nature of the business you evaluate.
Finally, volume-cost analysis is an important planning tool for making operating
decisions. This fi nancial management tool is used to help make and/or evaluate decisions
for the next operating period. Other fi nancial tools, specifi cally those related to capital
investment analysis, take a longer-term planning horizon. These tools will be discussed in
the next chapter.
Discussion questions
1.
What are the major steps in the decision-making process? What are some of the prob-
lems decision-makers encounter when trying to use this process?
2.
Is volume-cost analysis better used as a short-term or long-term planning tool? Why?
3.
Explain the difference between variable costs and controllable costs. Give an example
of each of these types of costs.
4.
A particular cost can be variable under some circumstances but fi xed in others. Given
the following expense items, what conditions might make each fi xed and what might
make each variable? Into which category do you think each generally is assigned, fi xed
or variable? Why?
a
Part-time labor expense
b
Sales compensation
c
Truck maintenance expense
d
Truck rental expense
e
Cost of goods sold
5.
What are the major assumptions made in determining the breakeven point? Which of
these assumptions do you feel is likely the most restrictive in practice? Why?
6.
The manager of a fi rm wants his assistant to “take action to lower our breakeven.”
Describe at least two ways to accomplish this goal. Are these choices good ones for a
typical fi rm? Why or why not?
7.
Consider the actions below. How would you examine the impact these changes would
have on the fi rm's breakeven level? Be specifi c. How would each of these actions affect
the fi rm's breakeven point?
a
Hire a new salesperson
b
Pay additional overtime help
c
Increase advertising expense
d
Fire one of three assistant managers
Case study: True Red Greenhouse
Bob Collins works as an engineer and his wife, Julie, teaches middle school. About fi ve
years ago they built a 30´
120´ greenhouse to grow tomatoes to sell at a farmers' market
and to local grocery stores. The project started as a hobby, but business has grown and now
Bob and Julie want to evaluate several changes in the business to improve their return on
equity, because Bob is considering retiring and working full-time in the greenhouse. They
have decided to use volume-cost analysis to evaluate the changes.
Bob, with the help of his accountant, has determined that True Red's fi xed costs or
overhead for the coming year will be $5,032. They produce about 17,600 pounds of
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