1. Cost & Return Analysis Farm & Ranch Business Management Chapter #5 Farm & Ranch Business Management Chapter #5

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

3. Where is the maximum profit? Lbs. Of FertilizerYield 020 2025 4032 6040 8045 10048 12045

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 FertilizerYieldAdded 0200 20255 40327 60408 80455 100483 12045-3

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. YieldAddedAvg Prod. 020020 2025525 4032716 6040813.3 8045511.1 1004839.2 12045-37.5

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. YieldAddedAvg Prod. 020020 2025525 4032716 6040813.3 8045511.1 1004839.2 12045-37.5

10. How much fertilizer? Lbs. Of Fert. YieldAddedAvg Prod. 020020 2025525 4032716 6040813.3 8045511.1 1004839.2 12045-37.5

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 AddedVal.AddAvg Prod. 020 20$10255$1525 40$10327$2116 60$10 408$2413.3 80$10 455$1511.1 100$10 483$99.2 120$10 45-3$-97.5

13. Profit Maximizing Rule Fert.Total Yield Lbs.Cost Yield AddedVal.AddAvg Prod. 020 20$15255$12.5025 40$15327$17.5016 60$15 408$2013.3 80$15 455$12.5011.1 100$15 483$7.509.2 120$15 45-3$-7.507.5

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 SBMPrice of Corn Corn = $.05 and SBM = $.13, ratio =.13/.05 = 2.6 Now divide changes and find a ratio of 2.6 Page 5-11