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# Class Note for EconS 350 with Professor Painter at WSU 05

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Date Created: 02/06/15

Par rial Budge ring A par39TiaI budgeT examines only Those cosT and r39eTur39n facTor39s ThaT change as a r39esulT of making an adjusTmenT in The business Simplifies The analysis by eliminaTing The consTanT facTor39s Examples of par rial budge r problems Subs ri ru rion of one crop for ano rher Adding 10 or 20 cows To a larger herd Adop rion of a new produc rion prac rice Participation in a governmen r program Owning machinery versus cusTomhiring The parTial budgeT simplifies The analysis by focusing on average annual performance ThaT is whaT happens in a Typical year The shorTer The Time period involved The more accuraTe The parTia budgeT Regardless of The budgeTing meThod The analysis should answer 1 Will The proposed adjus rmen r be profiTable 2 Are The risks of financial loss due To unforeseen andor unconTrollable adverse evenTs accepTable PROFITA BILITY calculaTed over39 The life of The invesTmenT is deTer39mined by Two measures in The analysis Change in average annual pr39ofiT ReTur39ns over39 all cosTs ReTur39n To risk of making proposed change Average annual rate of return on inves rmen r If The r39a re of r39e rur39n exceeds The cos r of capi ral The inves rmen r is pr39ofi rable The cosT of capiTal is The inTer39esT r39aTe ThaT r39epr39esenTs The cosT of The funds used To finance The invesTmenT r39eal andor oppor39TuniTy cosT EsTimaTes based on Typical year39 over39 The life of The invesTmenT USING A PARTIAL BUDGET Fir39s r necessary To iden rify rhe fac ror39s rha r will be affec red by The proposed adjustment Nex r each of These fac ror39s mus r be quan rified on an annual basis and classified Posi rive effec rs Nega rive effec rs Added r39e rur39ns Added cos rs Reduced cos rs Reduced r39e rur39ns PARTIAL BUDGET Positive Impacts Acre Neqative Impacts Acre A Added Returns C Added Costs 1 1 6 0301wa 9999999 TlPOOR Total Added Returns Total Added Costs PARTIAL BUDGET page 2 Positive Impacts Acre Neqative Impacts Acre B Reduced Costs D Reduced Returns 1 1 2 2 3 3 4 4 5 5 6 6 Total Reduced Costs Total Reduced Returns PARTIAL BUDGET page 3 Total Positive Impacts Total Negative Impacts A B C D Change in Average Annual Net Income Loss Par rial Budge ring Exercise Pruning Apple Trees You overhear The following conversa rion be rween an apple producer and a WSU ex rension agen r Ex rension Agen r You should spend more Time pruning your apple Treesquot Producer I canno r afford To pay for more pruning laborquot Ex rension Agen r If you spen r 20 minu res more Time pr39uning each apple free how many more boxes of Woshing ron Ex rr39o Fancy Red Delicious apples would you ge rquot Producer I es rimo re obou r Two boxes per39 Tr39eequot Assume Pr39uning labor cos rs 12 per39 hour39 The assumed pr39ice received by The producer is 14 per39 box for39 Washing ron Ex rr39a Fancy Red Delicious apples and 8 per39 box for39 US Fancy Red Delicious apples For39 each box of Washing ron Ex rr39a Fancy apples gained a box of US Fancy apples is los r Knowing The above would iT be economically viable for The producer To increase his pruning Time by 20 minuTes per Tree Prove your answer by using a parTial budgeT To calculaTe how much money The producer would lose or gain per Tree if The pruning Time per Tree is increased by 20 minuTes PARTIAL BUDGET Increased Pruning of AppLe Trees Positive Impacts Acre Neqative Impacts Acre A Added Returns C Added Costs 1 14 x 2 boxes 2800 1 Labor 12x 13 hr 400 2 2 3 3 4 4 5 5 6 6 Total Added Returns 2800 Total Added Costs 400 PARTIAL BUDGET page 2 Positive Impacts Acre Neqative Impacts Acre Total Added Returns 2800 Total Added Costs 100 B Reduced Costs D Reduced Returns 1 1 8x2boxes 1600 2 2 3 3 4 4 s 5 5 6 6 Total Reduced Costs Total Reduced Returns 1 9 00 PARTIAL BUDGET page 3 Total Positive Impacts Total Negative Impacts A 3 12800 C D 2000 Change in Average Annual Net Income Loss 200 AfTer showing The above resulTs To The producer The producer says I Think The price of WashingTon ExTra Fancy apples is more like 12 per box The price of U5 Fancy apples is okay aT 8 per boxquot Would iT be economically viable for The producer To increase his pruning Time by 20 minuTes per Tree Prove your answer using a parTial budgeT PARTIAL BUDGET Increased Pruning of AppLe Trees Positive Impacts Acre Neqative Impacts Acre A Added Returns C Added Costs 1 12K 2 boxes 2400 1 Labor 12K 13 hr 400 2 2 3 3 4 4 5 5 6 6 Total Added Returns 2400 Total Added Costs 400 PARTIAL BUDGET page 2 Positive Impacts Acre Neqative Impacts Acre Total Added Returns 2800 Total Added Costs 100 B Reduced Costs D Reduced Returns 1 1 8x2boxes 1600 2 2 3 3 4 4 s 5 5 6 6 Total Reduced Costs Total Reduced Returns 1 9 00 PARTIAL BUDGET page 3 Total Positive Impacts Total Negative Impacts A 3 2400 C D 2000 Change in Average Annual Net Income Loss 100 Par39TiaI BudgeTing Fungicide ApplicaTion Problem ApproximaTely 5O per39cenT of a 200 acre wheaT field is infecTed by sTr39awbr39eaker39 fooT not This infecTion is primarily in The dr39aws of The field and Thus fungicide can be selecTively applied To These areas If fungicide is noT applied a 10 per39cenT yield loss can be expecTed on The infecTed acr39es In deciding whe rher39 To apply fungicide or39 no r The following infor39ma rion is available 1 Seven ry bushels is normal disease free yield 2 The expec red mar39ke r price of whea r is 375 per39 bushel 3 Fungicide cos r per39 acre is 1580 4 The aerial fungicide applica rion cos r is 550 per39 acre 5 The fungicide applica rion is applied approxima rely Thr39ee mon rhs before The har39ves red crop is sold 6 Oper39afing loans are ob rained of 8 percenfinferesf QuesTions 1 Does iT pay To apply fungicide 2 Given The price of wheaT aT 375 per39 bushel aT whaT yield loss buacr39e is The fungicide applicaTion a br39eakeven pr39oposiTion 3 Given The assumed yield loss whaT musT be The price of wheaT To make The fungicide applicaTion a br39eakeven pr39oposiTion NoTe CalculaTe on a per39 acre applied basis PARTIAL BUDGET Fumgioide APPLLcatiolL Positive Impacts Acre A Added Returns 1 9019993 Total Added Returns 26125 Neqative Impacts Acre C Added Costs 7 low x4375 26125 1 Fuwgiciole 1590 2 AeriaLAppL LcatLow 550 3 2030 x 08 x 312 041 4 5 6 Total Added Costs 2171 PARTIAL BUDGET page 2 Positive Impacts Acre Neqative Impacts Acre Total Added Returns 2625 Total Added Costs 12121 Reduced Costs Reduced Returns B D 1 1 2 2 3 3 4 4 5 5 6 6 9999999 Total Reduced Costs Total Reduced Returns PARTIAL BUDGET page 3 Total Positive Impacts Total Negative Impacts A 3 Q 25 C D 2171 Change in Average Annual Net Income Loss 151 Break even Weld Loss 2171375 573 but Break evew price 217101 bIL 310bu Par39Tial BudgeTing Cr39op Reseeding Problem A farmer has examined his sofT whiTe winTer39 wheaT crop and has deTer39mined ThaT a subsTanTial por39Tion of The sTand has suffered winTer39 kill He is undecided To r39eseed The affecTed acreage To har39d r39ed spring wheaT or39 To r39eTain The winTer39 crop and accepT subsTanTial r39educTions in yield To provide a good basis for39 decision making The following infor39moTion has been obToined 1 If noT r39eseeded The domo ed sofT whiTe winTer39 wheoT cr39op will yiel around 30 bushels per39 acre 2 If r39eseeded To hor39d r39ed spr39ing wheoT o 40 bushel yield can be expecTed Hor39vesT is six monThs from seeding Time 3 ExpecTed price for39 boTh sofT whiTe winTer39 wheoT and for39 hard r39ed spr39ing wheoT 375bu 4 All machinery used on The whea r crop is owned by The farmer 5 Reseeding will require Three addi rional field opera rions a Cul riva rion a r a cos r of 190 per acre for fuel lube repair and labor b Fer riliza rion a r a cos r of 160 per acre for fuel lube repair and labor c Drill a r a cos r of 260 per acre for fuel lube repair and labor Reseeding also will require Two addi rional inpuTs a Seed 80 lbs 12 lb b Ni rr ogen 25 lbs 34 lb Oper39a ring loans are ob rained a r 8 per39cen r annual interest Questions 1 Does i r pay To r39eseed 2 AT wha r yield for39 spring whea r buacre is r39eseeding a breakeven pr39oposi rion if The pr39edic red yield for39 win rer39 whea r is 30 bushels per39 acre 3 AT wha r yield for39 win rer39 whea r buacre is r39eseeding a breakeven pr39oposi rion if The pr39edic red yield for39 win rer39 whea r is 40 bushels per39 acre 4 Given The assumed yields in The iniTiaI problem and ThaT The price of winTer39 wheaT remains aT 375bushel whaT musT be The price of hard r39ed spr39ing wheaT To make r39eseeding a breakeven pr39oposiTion PARTIAL BUDGET Crop Reseediwg ProbLeWL Positive Impacts Acre Neqative Impacts Acre A Added Returns C Added Costs 1 40 bult375 15000 1 auLt wat Lont 130 2 2 FertiLizatiow 160 3 3 DYLLL 260 4 4 seed s j o 5 5 Nitrogen 850 6 6 12420x08x12 37 Total Added Returns 15000 Total Added Costs 251739 PARTIAL BUDGET page 2 Positive Impacts Acre Neqative Impacts Acre Total Added Returns 15000 Total Added Costs 2512 B Reduced Costs D Reduced Returns 1 1 30 buX375 11250 2 2 3 3 4 4 s 5 5 6 6 Total Reduced Costs Total Reduced Returns 11 250 PARTIAL BUDGET page 3 Total Positive Impacts Total Negative Impacts A 3 15000 C D Change in Average Annual Net Income Loss 11233 Breakeven analysis When total positive impact total neg impact what will be the value of the important unknowns price yield etc You solve for them algebraically Price x Yield of new crop total costs of proposed change Breakeven Price costsyield Breakeven analysis set positive impacts cf change brea leeven eqaaL to totaL negative impacts and soLve for the brea Rexen gieLd and price for spring wheat Positive effects revenue from spring wheat price x gieiol Negative effects costs of spring wheat pLantings Lost revenue from winter wheat Erea le even gieLd for spring wheat x price 13797ac Break even gieLa x 375bu 13767ac Breakeven gieLa 8767bu 375ac Erea le even gieiol 3e7 bitac Brea IQeven price for spring wheat x gieid 137c7ac Brea le even price x 40 baac 13767ac Break even price 13767MGVHO lowac 34M Wha r would The yield of The win rerkilled win rer39 whea r have To be To be equal To r39eseeding i r To spring whea r When wouLol revenue from winter wheat 5 LeLd x price revenue costs or spring wheat B E gLeLol x 375 15000 2517 B E gLeLd 15000 2517375 B E gieLol 33123 blL Par rial Budge ring Exercise Bovine Soma ro rropin Adop rion Bovine soma ro rropin BST is a na rurally occurring pro rein produced in The pi rui rary glands of ca r rle IT has been known for over 50 years Tha r supplemen ring The BST of lac ra ring dairy cows increases milk produc rion Recen r bio rechnology research has made if possible To produce commercial quan ri ries of BST of a rela rively low cos r You are a manager of o 200 cow doiry herd and are Trying To decide wheTher or noT To use BST as porT of your producTion program You have The following informoTion obouT EST and The effecT iT will have on The producTion of your cows The period of IocToTion The producing period for each cow is opproximoTely 242 days The average per39 day increase in milk pr39oducTion during The lacTaTion period per39 cow supplemenTed wiTh BST is 10 lbs The average gr39oss milk price is 1150 per39 ch During The 242 day lacTaTion period The cow will be given 17 doses of BST aT a cosT of 750 per39 dose The labor39 Time iT will Take To adminisTer39 each dose To each cow is appr39oximaTely 3 minuTes Labor39 is paid 14 per39 hour39 Added pr39oduc rion also brings a per39 cow increase per39 lac ra rion period in feed cos r of approximately 100 hauling and marketing cos r of 20 and o rher39 miscellaneous cos r of 7 1 Using The following par39Tial budge r for39m de rer39mine how pr39ofi rable or39 unpr39ofi rable if is likely To be on a PER COW basis if BST is used 2 Based on your39 answer in 1 wha r mus r The price of milk be for39 This To be a breakeven si rua rion ie To be equally as pr39ofi rable To use EST or39 To no r use BST Positive Impacts HeadY ear PARTIAL BUDGET 15on Somatotropiw AdoptionL Neqative Impacts HeadY ear A Added Returns C Added Costs 2 3 4 5 6 1 242 x 101oo x 1150 127230 1 B511 17 X 750 12750 2 LabOY217X360lt 414 1190 3 Added feed cost 10000 4 Hamming marketing 2000 5 Misc 700 6 Total Added Returns 127830 Total Added Costs 26640 PARTIAL BUDGET page 2 Positive Impacts HeadY ear Neqative Impacts HeadYear Total Added Returns 22230 Total Added Costs 26610 Reduced Costs Reduced Returns B D 1 1 2 2 3 3 4 4 5 5 6 6 9999999 Total Reduced Costs Total Reduced Returns PARTIAL BUDGET page 3 Total Positive Impacts Total Negative Impacts A 3 27230 C D Q 40 Change in Average Annual Net Income Loss 1190 BreakEven Milk Price 26640U24 2X10V100 1101 Purchase of a Bale Wagon Cus rom hiring The hauling and s racking of hay of 035 per bale Produces 40000 bales per year Considering purchase of a used self propelled bale wagon a Purchase price 40000 b Years of life 10 years c Salvage value 10000 d Labor39 cos r 1000 per39 hour39 e 200 bales per39 hour39 of machine Time 1 Labor39 Time equals machine Time x 125 9 600 per39 hour39 of machine Time for39 fuel h 900 per39 hour39 of machine Time for39 repair and mainTenance i Taxes insurance and housing are 1500 per39 year39 4 AITer39naTive invesTmenTs will r39eTur39n 8 per39 yean BALE WAGON Profi r Analysis Depr39ecia rion Prafi r Analysis Purchase Price Salvage Value Years of Life 40000 10000 3000year39 10 years Cos r of In rer39es r Pr39ofi r Analysis Purchase Price Salvage Value Average Value of Inves rmen r 2 40000 10000 25000 x 8 2000 Hours of Operation 2 40000 bales200 bales per39 hour39 2 200 hours Labor39 COST 2 200 oper a rion hour39s x 125 hours x 1000 2500 Fuel COST 2 200 opera rion hour39s x 600 1200 Repair and Main renance 200 opera rion hour39s x 900 1800 Taxes In5ur39cmce and Housing 2 1500 PARTIAL BUDGET Purchase of BaLe Wagon A Added Returns C Added Costs 1 1 Depreciation 3000 2 2 Interest 2000 3 3 Labor 2500 4 4 FueL 1200 5 5 Repairs 1200 6 6 Tilt 1500 Total Added Returns Total Added Costs 12000 PARTIAL BUDGET page 2 Total Added Returns Total Added Costs 12 000 B Reduced Costs D Reduced Returns 1 Custom Fees 14000 1 6 6 2 2 3 3 4 4 5 5 Total Reduced Costs 147000 Total Reduced Returns PARTIAL BUDGET page 3 Total Positive Impacts Total Negative Impacts A 3 14000 C D 12000 Financial Analysis 1 Change in annual profit 11000 total positive effect 12000 total negative effect 22000 2 Average amount invested over the life of investment 10000 initial cost of investment W terminal value of investment 2 225000 3 Average beforetax rate of return on investment 2000 change in annual profit line 1 L 2000 interest added cost column 25000 average amount invested line 2 x 100 16020 RISK is analyzed by varying key assump rions and recalculaTing and by using a breakeven analysis on The more impor ran r ye r highly uncer rain assump rions Two uncer39Tai n yeT impor39TanT facTor39s in The bale wagon invesTmenT analysis are The cusTomhir39e fee and The number of bales har39vesTed annually The br39eakeven cusTom r39aTe can be compuTed in The following manner ToTal PosiTive EffecTs ToTal Neanive EffecTs 40000 bales x cusTom fee 2 12000 Breakeven cusTom fee 2 12000 40000 Breakeven cusTom fee 2 30 Thus a cusTom fee of 30 r39eSulTs in a br39eakeven invesTmenT Assuming a cus rom fee of 35 The br39eakeven number of bales har39ves red can be calcula red as follows Tofal Posifive Effecfs Tofal Neqafive Effecfs 35 x bales har39vesfed 6500 fixed cos rs1 1375 var39iable cosfs per39 bale har39vesfedz 6500 1375 bales 35 x bales har39vesfed har39vesfed 2125 x bales har39vesfed 6500 Bales har39vesfed 30588 1 Fixed cosfs include depr eciafion infer esf on average value of invesfmenf pr oper fy faxes in3ur39ance and housing 2 Variable cost per39 bale 1375 is The Sum of repairs fuel and labor39 5500 divided by 40000 bales Thus providing The cusTom r39aTe is 35 per39 bale and all The oTher39 assumpTions hold True The farmer will break even on The invesTmenT if he har39vesTs 30588 bales of hay annually SUMMARY Several poinTs inher39enT wiTh The use of a par39Tial budgeT should be noTed 1 CosTs and r39eTur39ns noT affecTed by The choice of alTer39naTives ar39e noT included in The analysis 2 The accuracy of a par39Tial budgeT analysis is no beTTer39 Than The infor39maTion used in The analysis 3 A single por39Tiol budgeT compares only Two oITer39noTives 4 Por39Tiol budgeTing does noT occounT for39 The Time value of money 5 The effecT The invesTmenT will have on The cash flow of The business has noT been deTer39mined Tha r39s A

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