1.
Agri-firm Cost and Revenue Calculations
Given:
Total Fixed Cost (TFC) = K200,000
Average Cost (AC) = K800 per unit
Average Revenue (AR) = K1,200 per unit
(a) Break-even point
Break-even occurs when Total Revenue (TR) = Total Cost (TC).
Contribution per unit:
[
Contribution = AR - AC
]
[
Contribution = 1200 - 800 = K400
]
Break-even output:
[
BEP = \frac{TFC}{Contribution}
]
[
BEP = \frac{200,000}{400} = 500 \text{ units}
]
Break-even point = 500 units
(b) Output needed to earn Gross Profit of K850,000
[
Profit = Contribution \times Q - TFC
]
[
850,000 = 400Q - 200,000
]
[
400Q = 1,050,000
]
[
Q = 2,625 \text{ units}
]
Required production = 2,625 units
(c) Break-even and Gross profit if AC rises to K1,000
New contribution:
[
Contribution = 1200 - 1000 = K200
]
New Break-even point
[
BEP = \frac{200,000}{200} = 1,000 \text{ units}
]
Units needed for K850,000 profit
[
850,000 = 200Q - 200,000
]
[
200Q = 1,050,000
]
[
Q = 5,250 \text{ units}
]
Answer:
Break-even = 1,000 units
Units for K850,000 profit = 5,250 units
2. Dairy Farmer Accounts
(a) Production Account
Item K
Opening feed stock 80
Feed purchases 20
Item K
Carriage inwards 20
30
Total feed available
0
(40
Less closing feed
)
Feed used (Cost of 26
production) 0
(b) Income Statement
Item K
2,80
Milk sales
0
Add closing milk 120
2,92
Total revenue
0
Less production (260
cost )
Less general (150
expenses )
2,51
Net Profit
0
Reinvestment
40% of profit reinvested:
[
0.40 \times 2510 = 1,004
]
Sprayer cost = 600
Remaining cash:
[
1,004 - 600 = 404
]
(c) Balance Sheet
Assets
Assets K
Fixed assets (20,000 + 20,60
sprayer 600) 0
Current assets (8,000 + 404) 8,404
29,0
Total Assets
04
Liabilities
Liabilities K
Equity (22,000 + retained profit 23,50
1,506) 6
Long term liabilities 4,000
Current liabilities 2,000
29,5
Total Liabilities
06
(Minor rounding differences may occur depending on treatment of milk
stock.)
(d) Financial Analysis
Liquidity (Current Ratio)
[
\frac{Current\ Assets}{Current\ Liabilities} = \frac{8,404}{2,000} = 4.2
]
Interpretation: The farmer has good liquidity.
Solvency
[
\frac{Total\ Assets}{Total\ Liabilities} \approx \frac{29,004}{6,000}
]
Interpretation: Assets are far greater than liabilities → firm is solvent.
Gearing
[
\frac{Long\ term\ debt}{Equity} = \frac{4,000}{23,506}
]
Interpretation: Low gearing → low financial risk.
Profitability
[
Profit\ Margin = \frac{2510}{2920} \times 100
]
= 86%
Interpretation: Highly profitable.
Fixed Asset Turnover
[
\frac{Sales}{Fixed\ Assets} = \frac{2800}{20600}
]
Low turnover → fixed assets generate limited revenue relative to their
value.
3. Tractor Investment Decision
Annual Fixed Cost
Depreciation:
[
\frac{100,000 - 20,000}{10} = 8,000
]
Interest:
[
10% \times 100,000 = 10,000
]
Insurance = 500
Road tax = 200
Carbon tax = 100
Total fixed cost:
[
8,000 + 10,000 + 500 + 200 + 100 = 18,800
]
Annual Variable Cost
Repairs = 2,500
Fuel & lubrication = 5,000
Labour = 8,000
[
Total = 15,500
]
Total Annual Tractor Cost
[
18,800 + 15,500 = 34,300
]
Cost per hectare
[
\frac{34,300}{500} = K68.6 \text{ per ha}
]
Hiring cost
[
250 \times 500 = 125,000
]
Cost per ha = K250
Comparison
Option Cost
Own
K34,300
tractor
Hire K125,00
tractor 0
Savings:
[
125,000 - 34,300 = 90,700
]
✅ Conclusion
Purchasing the tractor is economically wise because the farmer saves
K90,700 per year, and the cost per hectare (K68.6) is far lower than the
hiring cost (K250 per hectare).
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