partial budget, production function Flashcards
Production function
the technical relationship between the amount of inputs and the output produced:
the relationship relates to the amount of products that can be produced for alternative combinations of inputs within a specified time interval, for example one year
Y=X1/X2….Xn)
X= the amount of the input, e.g. veterinary services
Y= the amount of products produced, e.g. kg of weight gain
TPP
Total physical product - the sum of physical product
MPP
Marginal Physical Product - the increment to total physical product attributable to the addition of a single unit of input
APP
average physical product: equal to the average output per unit of variable input
calculated as total physical product divided by the amount of variable input used
increasing productivity
each additional unit of variable input adds more to the total output then the previous one
constant productivity
each additional unit of variable input added to the fixed factors increases output by the same amount
diminishing productivity
each additional unit of variable input adds less to total output then the previous one
variable cost
e.g. veterinary services and AI, feedstuffs, fertilizers, seeds, sprays, casual labour, contract hire of machinery
it tends to vry directly with small changes in the size of the enterprise (dependent on production levels)
can be changed in short term by decision maker
can easily be allocated to a specific enterprise
fixed costs
it does not vary with small changes in the size of the enterprise -independent on production level
volume can not be changed by the decision maker
it is hard to allocated to a specific enterprise
for example: regular labor, power and machinery running costs, machnery and building depreciation, rent and/or landowning costs, interest changes, fixed tax
When is the profit maximised?
where marginal cost and returns are equal
conventional budget
easiest method to calculate the farms profit
takes into account each costs and returns
can serve as an initial test of farm profitability
useless for more accurate control
Farm profit calculation
Total return - total cost
gross margin calculation
total return - total variable cost
Profit and Gross Margin definition
it is usually calculated individually for each farm enterprise and measures the contribution made by each of the farms enterprises towards covering the farms fixed costs
Profit Margin:
Profit margin is one of the commonly used profitability ratios to gauge the degree to which a company or a business activity makes money. It represents what percentage of sales has turned into profits. Simply put, the percentage figure indicates how many cents of profit the business has generated for each dollar of sale.
Gross Margin:
Gross margin is net sales less the cost of goods sold (COGS). In other words, it’s the amount of money a company retains after incurring the direct costs associated with producing the goods it sells and the services it provides. The higher the gross margin, the more capital a company retains, which it can then use to pay other costs or satisfy debt obligations
Gross profit refers to the money a company earns after subtracting the costs associated with producing and selling its products. Gross profit is represented as a whole dollar amount, showing the revenue earned after subtracting the costs of production.
When do we use partial budgeting?
the method of choice when the proposed analysis concerns a simple economic comparison of disease control measures on a farm and the outcome does not involve a specific time pattern nor a high degree of uncertainty
does not affect the whole operation of the farm
or the data is not available to conduct a more complex analysis
