Problem Set 2 Key

Problem Set 2 Key - AAE 320 Farming Systems Management...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1 AAE 320 Farming Systems Management Problem Set #2 Answer Key 1) Your cousin owns a store in a small town in Wisconsin. Last year sales revenue for her store was $750,000. Her variable operating costs are $630,000 per year. Annual interest expenses on the bank loan are $50,000. Inventory and business equipment she owns have a current market value of $750,000. She owes a local bank $600,000 in a business loan. A store in a local mall offers her a job paying $50,000 per year to manage their store. If she liquidated her inventory and equipment and closed her store, she could invest the remaining money to earn 10% annually. a) Compute her accounting profit. Revenue 750,000 Variable Operating Costs 630,000 Interest Expense 50,000 Accounting Profit (before tax) 70,000 b) Compute her economic profit. Revenue 750,000 Variable Operating Costs 630,000 Interest Expense 50,000 Opportunity Cost of Potential Income 50,000 (salary from her next best alternative) Opportunity Cost of $100,000 equity 15,000 ($150,000 @ 10% annual return) Economic Profit (before tax) 5,000 c) She asks you for advice on whether to close the store and take the manager job, or to stay and run her own store. Which do you recommend and why? Because her economic profit is positive, she is earning an above normal rate of return on her skills and equity by keeping her store open. She should keep the store according to this simple analysis. However, we have ignored any other personal benefits she may get from keeping the store or taking the other job. Therefore, unless she has strong personal reasons to close the store (e.g. tired of working weekends) or to take the other job (e.g. health insurance), she is better off staying with her store, even if they offer her $55,000 as manager for the mall store, which would give her an economic profit of zero. ==================================================================== 2) You are deciding on how many steers to put on your 150 ac pasture. You will to start them in early-to-mid May and sell them in early-to-mid October (165 days). Contacting with your local extension agent, you receive a publication that has the following equation for the average daily gain in pounds (ADG): ADG = 2.9 – 0.3*SR, where SR is the initial stocking rate (500 lbs of live animal per acre initially put on the pasture). Total gain per steer will then be the ADG times the number of days you keep them on the pasture. You can buy steers from a neighbor for
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/08/2008 for the course AAE 320 taught by Professor Mitchell during the Spring '08 term at Wisconsin.

Page1 / 4

Problem Set 2 Key - AAE 320 Farming Systems Management...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online