A partial budget spreadsheet to calculate whether the net benefit of buying heif
ID: 2547023 • Letter: A
Question
A partial budget spreadsheet to calculate whether the net benefit of buying heifers for beef cow replacement. List each of the added returns and reduced costs that make buying more attractive and each of the reduced returns and added costs that make buving less attractive. Consider costs and returns on a per-head (per-replacement-heifer) basis over the period of time from when the producer decides to hold back or sell a heifer calf and when the purchased heifer will arrive at the ranch. Your uncle has given the you the following information based on his current operation: o Heifer calves may be sold when they are 500 lbs at 6 months of age for $1.45 per lb He earns 3% interest per year on any cash on hand They arrive at the ranch when they 22 months of age months from weaning until potential purchased heifers would join the herd include: » Purchased replacement heifers cost $1800 per head plus S50 in transportation costs. » Variable, per head, costs incurred by raising replacement heifers over the sixteen Feeding costs of $475 Veterinary costs of $45 Fuel and equipment costs of $12. Marketing and transportation costs of $10. Labor costs of $145. » Fixed costs related to raising replacement heifers allocated on a per head basis include Machinery, housing, and fencing costs of $75. Interest and insurance costs of $108 Bull depreciation and replacement costs of $50Explanation / Answer
Situation 1 not buying the heifers.
Particulars
Cost ($)
Non Avoidable Variable Cost.
Feeding Cost
475
Veterinary cost
45
Fuel and Equipment Cost
12
Marketing and Transportation cost
10
Labor cost
145
Total Variable cost (A)
687
Non Avoidable Fixed Cost
Interest and Insurance cost
108
Total Non Avoidable Fixed Cost (Fixed cost affect sales look Note 1.(B)
108
Total Non Avoidable Cost © (A+B)
795
Avoidable Cost (D) Purchase of new one
1850
Gross Benefit (E) = Avoidable Cost - Non-Avoidable Cost
1055
Income loosed due to noot Selling
725
Interest loss
60.8
Total opportunity Cost (F)
785.8
Net Benefit (F)=(E)-(F)
269.2
Situation 2 buying the heifers.
Particulars
Cost
Avoidable Variable Cost
Feeding Cost
475
Veterinary cost
45
Fuel and Equipment Cost
12
Marketing and Transportation cost
10
Labor cost
145
Total Variable cost (A)
687
Avoidable Fixed Cost
Interest and Insurance cost
108
Total Avoidable Fixed Cost (Fixed cost affect sales look Note 1.(B)
108
Total Avoidable Cost ©= (A+B)
795
Income received by selling the cow in 6 months (D)
725
Interest receivable on the decision (E)
60.8
Gross benefit (F)=©+(D)+(E)
1580.8
cost of purchasing New one (G)
1850
Net Loss =(G)-(F)
269.2
Conclusions: As situation 1 Provided More Favorable decision its Advisable to not buy and Replace.
Note 1.
Here Variable cost includes all cost because units directly related to the decision and The only fixed cost relating to the decision as of insurance based on assumption that the insurance took on per head basis.
Note 2.
The interest rate used is for 16 Moths
3%/12*16=4%
Particulars
Cost ($)
Non Avoidable Variable Cost.
Feeding Cost
475
Veterinary cost
45
Fuel and Equipment Cost
12
Marketing and Transportation cost
10
Labor cost
145
Total Variable cost (A)
687
Non Avoidable Fixed Cost
Interest and Insurance cost
108
Total Non Avoidable Fixed Cost (Fixed cost affect sales look Note 1.(B)
108
Total Non Avoidable Cost © (A+B)
795
Avoidable Cost (D) Purchase of new one
1850
Gross Benefit (E) = Avoidable Cost - Non-Avoidable Cost
1055
Income loosed due to noot Selling
725
Interest loss
60.8
Total opportunity Cost (F)
785.8
Net Benefit (F)=(E)-(F)
269.2
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