AEC 211 Midterm

reasons to use break even analysis

helps max profitability by finding a combo of costs, output, and selling price that generates 0 profit or loss (break even point)

Elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants elastic = sensitive to price inelastic = not sensitive to price

cross-price elasticity

% change in Q demanded due to a 1% change in the price of a competitors product OR a complement good

Strategy

- Having contingency Plans - Being on the same page - Organizational learning - Best way forward in the long run

Major Drivers of change

- New Tech - Global Trade - Climate Change - Consumers

How to achieve competitive advantage

- improve margins - create self sustaining blue ocean

how is a capital expenditures budget used in decision making

- it shows how much money is put into each capital asset -tells you what you can or need to spend money on -tells you what you owe on assets and if you can pay them -expenses listed by priority so you can make sure you pay the most important stuff first

average rate of return method - C.B. decision making

evaluates capital budgeting opportunities by measuring the annual percentage return on the capital invested in a project

incremental analysis

an analytical approach that focuses only on those costs and revenues that change as a result of a decision

Agribusinesses use insurance

as a way to protect themselves from physical risks such as fire, weather, and crop damage. however it cannot cover all risks

what valuation of asset method would you use for a tractor

book value: purchase price minus depreciation

futures contract

buyers and sellers agree on a price, quantity, quality of a product to be purchased in the future. - creating a futures market.

discounting

calculate how much money needs to go into an account to grow to a specific amount at a certain time

compunding

calculating how much a dollar will be worth years from now

Shifts in demand

change in taste/preference inverse relationship population and # of buyers

equimarginal allocation principle

compares the change in profit from using an additional input to produce one product versus another

ways to measure opportunity cost of money (time value of money)

compunding discounting present value

when should you use double declining depreciation method?

durring successful years when you have extra money to spend on new equipment. this minimizes tax exposure during good years.

Discounting

finding a sum of future money in todays values future val = present val * (1+int rate)^n

compounding

finding future value of a sum of money you have today

Partial budgets

either/or decisions what's changing?

payback method - capital budgeting decision making

evaluates capital budgeting opportunities by determining how long it takes for the investment to earn its money back

what valuation of asset method would you use for wheat in storage?

market value: what its worth today

benefit/cost ratio method - C.B. decision making

measures benefits generated for each dollar invested.

Profit as a percentage of sales ratio

measures profit as a percentage of each sales dollar; it is calculated by dividing profit before taxes by total sales

Return on invested capital ratio

measures the profit before taxes asa percentage of the value of all the assets used by the firm to earn that profit income before tax / total assets

times interest earned ratio

measures the risk of the firm not meeting its interest payments on loans income before tax + int exp / int exp

Break even

the amount of sales needed to break even FC and MC

profit maximizing production area

the area on the graph where profit curve starts to curve

diminishing marginal returns

the curve graph that decides when profit is no longer increasing like an upside-down U

cyclical pricing

this is done over years. Also remember: diversification forward contracting crop insurance Hedging

When managing an agribusiness, does the past predict the future?

to an extent, there are certain ideas that we can learn from by previous experiences and forecast the next few quarters where we can build from what we learned

GOAL OF STRATEGY

to create and sustain competitive advantage

why should you remove the factors of inflation when setting a price

to determine whether the projected annual price is due to inflation of $ or rise in price

break even analysis

tool used to determine chances of success

uses for tracking depreciation

track the expense of loss of value of an asset OR managing tax payments. value lost can be a tax write-off selling something for more than it is worth- profit can be taxed

if income/expenses are predictable: which depreciation method should you use

use straight line

price index

used for adjusting for inflation and dollars of other places

extrapolation

uses the simple idea of whatever happened in the past will happen in the future

what are opportunity costs?

what is given up when not choosing the highest value option

Shutdown price

when market price is les than or equal to the average variable cost break even price = Average variable cost + fixed costs

what does price index show

the average price of the month as a % of the average price of the year

diminishing marginal utility

Decreasing satisfaction or usefulness as additional units of a product are acquired

Thinking first / rational model of decision making

Define Diagnose Design Decide

law of demand

the inverse relationship between price & quantity demanded

ways to organize

-By business function -By product -By geographic area

how can futures markets be used in forecasting

-forecast a selling price in the future based on the opinions of buyers and sellers -determine whether you should store a crop if you can sell if for more later on -determine how much input costs should be, based on predicted sales price.

what does cross-price elasticity help determine

-how the change in the price of a complement good or a competitors good effects the sales of your product -whether a good is a substitute or a complement to your product

valuation of assets methods

-market value: what its worth today -book value: purchase price minus depreciation -cost basis: what you paid for it -production costs: what you put into it

reasons to hold inventory

-match supply with demand -stockout prevention -lower purchasing costs

inelastic

-quantity demancec changes less than the change in price -people buy about the same amount whether the price rises or drops -goods are usually necessities

elastic

-quantity demanded changes more than the price. -price change has a big effect on how much consumers will buy

what does income elasticity determine

-the effect of changes in income on sales -income determines the amount people will buy or spend on a good. -if a good is a luxury or necessity -people will spend more money on luxuries as their income rises.

what does price elasticity help determine

-the price of a good based on the amount that is demanded at a certain price. -set the price to where the quantity demanded is the highest. -if goods are elastic or inelastic

purpose of cash flow budget

-to make sure there is cash available when needed. -shows when you have surplus cash which can be invested. -shows when payments need to be made.

why should managers use forecasting

-to reduce uncertainty -to predict how much to produce, how many workers to hire etc -predict future buy habits, impacts of tech, other impacts on markets

The five factors of forecasting?

1)Accuracy desired 2)time premitted to develop the forecast 3)the complexity of the situation to be explained 4)the time period to be projected 5)the amount of money available to carry out forecast

Porter's 5 forces

1. current competitors 2. New entrant 3. bargaining power of suppliers 4. bargaining power of buyers 5. threats of substitutes

limitations of budgets

1. they are estimates, not sure things 2. the execution of a budget is not automatic 3. Budgets cannot take place of good management 4. good budgeting requires time and patience

partnership

A business in which two or more persons combine their assets and skills

Sole Proprietorship

A business owned by one person

Corporation

A business owned by stockholders who share in its profits but are not personally responsible for its debts

Limited Liability Company (LLC)

A company similar to a corporation but without the special eligibility requirements.

profit and loss statement (income statement)

A financial document showing a firm's income or expenditure in a particular time period

Accounts Receivable Turnover

A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable.

Economics

Allocating scarce resources among competing needs

Acid Test Ratio

Current Assets - Stock / Current Liabilities it is the ultimate test of liquidity

Current ratio

Current assets/ Current liabilities. Measure of: -liquidity -solvency -profitability -debt repayment

Managers are:

Decision makers

Amortization Method

Evaluates capital budgeting alternatives by putting everything on a yearly basis rather than comparing total benefits and total costs.

Business Organization

Keep it simple, focused, lean, and accountable

4 Principles of Organizational Design

Keep the organizational structure simple Give critical tasks prominence and allow them to function without restriction Keep support staff to a minimum Keep working units small

Enterprise budget

Look at costs in certain enterprises revenues

Real interest rate =

Nominal interest rate - inflation rate

operational / strategic

Operational: Are we doing things well? Strategic: are we doing the correct thing?

Graphical analysis

Plotting data on a graph so that a manager can see what patterns are present in the data.

Equity

RE Contributed Capital Valuation Equity

Enterprise budgets

See what's available as a resource

capital expenditures budget

The budget that presents the company's plan for purchasing property, plant, equipment, and other long-term assets.

Net present value method - C.B. decision making

The difference between the present value of its benefits and the present value of its costs

Return on Invested Capital (ROIC)

The ratio of after-tax operating income to total invested capital; it measures the total return that the company has provided for its investors.

Should a farm maximize production on farmland

There is a diminishing marginal value for each unit you create. once you past the maximum amount of profit before the amount fo profit begins to decrease but still goes up then you need to stop.

Debt to Equity Ratio

Total Debt/Total Equity measures the relative size of claims on a firm's assets between its creditors and its owners

Net cash flow

Total inflows - total outflows

Managers need to ask:

What to produce - costs to start? labor and equip - Feasibility? bio and tech - Market Demand - returns? -Lifestyles and preferences?

Partial Budgets

Whats the pain and Gian of the cost objects

DDB is when

You have more taxable income and you can charge depreciation to the taxable income

For agribusiness, what's the role, purpose, function of having a strategy

allows farmers to plan accordingly for anything that may go wrong in the future in order to not be ruined by one single event

the balance sheet

a "snapshot" of an organization's financial position at a given moment does not tell anything about profitability

declining balance method

a depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the asset's useful life

inferior good

a good that consumers demand less of when their incomes increase

Strategic management

a process that involves managers from all parts of the organization in the formulation and the implementation of strategies and strategic goals are we doing things correctl

straight-line depreciation method

allocates the depreciable cost of an asset in equal periodic amounts over its useful life

Inventory turnover ratio

cost of goods sold/average inventory how many times you can turnover your inventory in a year

the goal with contribution is to:

cover all variable costs plus art least some fixed costs

Balance sheet elements

current assets fixed assets current liabilities long term liabilities Owner's equity

Net Working Capital (NWC)

current assets minus current liabilities the cash available to the firm to meet day to day and unexpected expenses

contribution is used to

determine the most profitable level of output in measurable units

how is capital budgeting used in decision making?

determine which option is most profitable evaluate potential investments

comparative statement analysis

horizontal and vertical comparisons are analyzed by the accountant. Horizontal Analysis-constitutes the comparison of amounts and percentages for a particular item or account over a period of two or more years. Vertical Analysis-shows percentage and total comparisons for two or more years in vertical columns on a single sheet.

solvent

if assets are greater than liabilities, then networth is positive

insolvent

if assets are less than liabilities, then networth is negative

why should you include deferred taxes on balance sheet?

ignoring them inflates your equity value because you are claiming more than you are worth. these taxes will have to be paid in the future. not accounting for them will lead to the expectation that you will earn more money when you sell assets.

Seeing first

insight model prep incubation illumination verification

capital budgeting

involves evaluating the profitability of the firms potential investments in new property, plant, and equipment.

How does opportunity cost help make decisions

it helps with accounting for costs and making decisions. the cost can also be used for future forecasting

why should you use valuation of equity when creating balance sheet?

it is more accurate in showing your earnings/worth. returned earnings indicate profitability.

cash basis accounting

it is single entry revenue is recorded when received expenses are recorded when paid

goal of inventory management

keep costs low while meeting demands of customers. only hold items that are needed and just enough to meet demand.

Goal of capital budgeting

know what to expect know how much you have planning and control

Management Information Systems (MIS)

needs to provide 1. accurate and timely production and cost information on all phases of business 2. data int he proper form for decision making 3. accounting information that allows for quick assessment 4. a means to efficiently and effectively monitor and control the business

Return on Owner's Equity Ratio

net income/average owner's equity

Long term commitments are almost always

non-reversible

A break even cash flow is

occurs when the discounted cash flows over the economic life of a project result in a net present value of of zero or a B/C ratio of 1.0

how do wee look to the future

organizational structure: who makes decisions, who manages what, who's accountable? learning from the past tax liabilities estate 4 succesion planning

Functions of Management

planning, organizing, leading, controlling implementing, allocating, coordinating, evaluating, adjusting

Seasonal Pricing

pricing should change during a peak season o achieve maximum profits

contribution equation

selling price - variable costs = overhead profit + target profit

income statement purpose

separate income & expenses. helps make decisions. know where your money is coming from and where it is going.

Why find the index

so you know the variation of price changes. using historic price trend data allows this. buy low and sell high. helps us ask questions

SWOT Analysis

strengths, weaknesses, opportunities, threats looking at where the company is internally and its external environment S & W are internal & under direct control of management. O & T are external.

cash flow budgets

summarize the amount and timing of cash that is expected to flow in and out of the business during the budgetary period

Debt to asset ratio

tells you if you owe more than than you own or are worth.

what is the purpose of current ratio

tells you your financial health it tells you if you can pay your bills, if you have more money that debt, if you are profitable. if ratio is positive then you can pay your bills

Internal rate of return method - C.B. decision making

the discount rate that makes the present value of the investments benefits equal to the value of its costs

Production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good

Types of budgets

whole farm enterprise budgets partial budgets cash flow ex post