1. Farm & Ranch Business Management
Cost & Return Analysis
Farm & Ranch Business Management
Original Power Point Created by Casey Osksa
Modified by Georgia Agricultural Education Curriculum Office
June 2002

2. Production Function As inputs are changed, outputs are changed also
Example: fertilizing wheat

3. Where is the maximum profit?
Lbs. Of Fertilizer Yield

4. Law of Diminishing Returns
As an input is added in production, the output will increase at an increasing rate, then at a decreasing rate, and finally decline
English Translation: if you were to increase the amount of fertilizer on wheat, your yield in bu./acre would increase dramatically for the first few units, until you added enough fertilizer that the rate of yield increase would slow down, and may even become negative

5. Law of Diminishing Returns
Lbs. Of Fertilizer Yield Added

6. Stages of the Production Function
Stage #1: increasing average return for each added unit of input
Average Product = Total Yield divided by number of units added

7. Stage #1 Example Lbs. Of Fert. Yield Added Avg Prod. 0 20 0 20

8. Stages of the Production Function
Stage #2: begins when the marginal product equals the average product.
Diminishing returns begin to develop in stage #2
Stage #3: begins when the marginal product becomes 0.
Total product decreases if input is increased

9. Stage #3 of the Production Function
Lbs. Of Fert. Yield Added Avg Prod.

10. How much fertilizer? Lbs. Of Fert. Yield Added Avg Prod. 0 20 0 20

11. Profit Maximizing Rule
Add the variable input (fertilizer) to the point where the value of the marginal product equals the value of the added input.

12. Profit Maximizing Rule
Fert. Total Yield
Lbs. Cost Yield Added Val.Add Avg Prod.
20 $ $15 25
40 $ $21 16
60 $ $
80 $ $
100 $ $9 9.2
120 $ $

13. Profit Maximizing Rule
Fert. Total Yield
Lbs. Cost Yield Added Val.Add Avg Prod.
20 $ $
40 $ $
60 $ $
80 $ $
100 $ $
120 $ $

14. Fixed Costs Not used in profit maximizing rule
Must be considered to determine if you will make a profit or not

15. Opportunity Cost
Cost of using a resource in one way based on the return that could be obtained from using the resource in another way
Ex: labor, what is your labor worth if not farming?
Ex: interest, your money could sit in a bank and earn interest, or be used to invest in your business (farm)

16. Least Cost: Mathematical Approach
If one input (soybean meal) can be substituted for another (corn)
Usually don’t substitute at equal rates
Change in corn = Price of SBM
Change in SBM Price of Corn
Corn = $.05 and SBM = $.13, ratio = .13/.05 = 2.6
Now divide changes and find a ratio of 2.6
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