March 8, 2007corr
Name: KEY Participant # _______
ARE 495U Assignment
2- 10 points
Create 5 or more
marketing plan questions
that need to be answered
related to FF.
North Carolina FFA
Farm Business Management
Career Development Event
Section II: Problem Solving (200 points)
Read each problem carefully. The main concept of each problem is stated at the start of
each problem. Read the entire problem before beginning work on that problem.
Section II contains eight (8) problems. Check to see that you have 12 pages including the
cover page. Some pages may contain more than one problem. The point value for each of
your answers is stated in parenthesis to the right of each blank.
You have 100 minutes to complete this section of the Career Development Event.
Department of Agricultural and Resource Economics
College of Agriculture and Life Sciences
North Carolina State University
NCSU Box 8109
Raleigh, North Carolina 27695
in cooperation with
Department of Agricultural and Extension Education
College of Agriculture and Life Sciences
North Carolina State University
Southern States Cooperative, Inc
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 1
Problem 1- Business Organizations (24 points)
Helpful Information: Various types of business organizations are used by farms. Being able to identify a business type by its
characteristics will help you better understand which organization may best fit your situations in the future.
Match the following situations to the appropriate business organization by writing the letter in the space provided.
Each organization is used only once. (Each blank is worth 4 points)
A. Sole Proprietorship
C. Regular “C” Corporation
D. Tax Option “S” Corporation
E. Limited Liability Company
____C___1. Mr. and Mrs. Barlowe have been farming for over 30 years. Now their five children are grown and
four of them have continued working in the family farming operation. The two oldest, Kaye and Sid,
operate a cow-calf operation while the rest of the family tends to the 5000 acres of cropland. The four
children that remain on the farm are not interested in leaving the business and value the family farm. Due
to the children’s interest and investment in the farming operation, the Barlowes have changed the
business organization to ensure continuity of the business, limit personal liability. Pool resources, and
take advantage of tax savings. Mr. and Mrs. Barlowe also decided to transfer management of the farm to
Kaye and her husband, Bob. This situation makes sure that all of their children get an equal share of the
inheritance even if they are not working on the farm.
____A___2. Jason has just graduated from NC State University with a degree in agribusiness management. He
has decided to begin a grass fed cattle operation in southeastern NC. He will be in charge of managing
the farm business and directly received the benefits of hard work and good management. Also, he will be
able to quickly and easily expand the size of the business as he sees fit.
___F____3. The farmers in Johnston County jointly own and operate a local grain elevator. They also work
together to secure better prices for their goods, share risk, offer new services to local cattle producers,
and provide credit structured to the farmers needs.
____B___4. The Burkes live in Iredell County and farm wheat on 1500 acres there. Neighboring them are the
McCauleys who also farm wheat on nearly 2000 acres. The two families would like to combine their
resources and capital to gain profit. They have agreed to maintain ownership pf their personal property,
but jointly invest in a new tractor. In addition they have composed an agreement that outlines their
responsibilities, and talked extensively about their production practices and goals. They have agreed that
having been working so closely for 15 years this new agreement would fit them well.
____E___5. John Carter manages a farm in Piedmont NC. He does not own the farm, but receives a salary for
his work. John is not liable for any of the farm’s obligation. The owners of the farm he runs share the
profits or losses and jointly report as a whole. Additionally each member must report their share of the
profit or loss. Theoretically the members have no personal liability for the obligations of the farm either.
An operating agreement has been drafted to govern the affairs and conduct of the business.
____D___6. Samantha Bartlett owns and operates two meat processing plants in North Carolina. She is in
business with her brothers, David and Josh, as well as 10 close associates. They chose their current
business organization because their liability is based on their share of the business, the management of
the operations is limited to the Bartletts, and the security of continuing the business. In regards to taxes,
each party reports income form the business on their individual tax returns.
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 2
Problem 2- Budgeting (25 points)
The Brandts have been reviewing the enterprise budgets they prepared for their farm at the beginning of the year.
They would like to review their knowledge of budgeting and enterprise budgeting.
a. Match the terms on the right with their correct descriptions. Write the correct numbers in the blanks provided.
(1 point each)
Note: Each answer may be used only once.
__6__ Costs incurred by the farm that do not vary 1. Break-even
with the level of production.
__5__ Shows the projected costs and returns
associated with one production process, 3. Cost of Production
usually for one production period.
__8__ Invest money where it will earn the highest
returns. If you have limited resources, use 5. Enterprise Budget
each unit of a resource where it will give the
greatest returns. 6. Fixed Costs
__7__ Shows projected costs and returns 7. Partial Budget
associated with some change in the farm
or ranch business. 8. Principle of Equi-Marginal Return
__2__ A schedule of expected returns and costs.
9. Variable Costs
__9__ Costs which change directly with the level
of production. (Also called operating costs.) 10. Whole Farm Budget
__1__ The output required for revenue to equal the
total of fixed and variable costs.
__3__ Costs of the fixed and variable inputs needed
to obtain output.
__4__ A specific process or activity producing a single
_10__ Shows the physical and financial plan for the
entire farm or ranch business for a specific
period of time. It is the total of all production
b. Arrange in order the steps in developing a budget. Write a “1” for the first step, “2” for the second step, and so
on. (1 point each)
__5__ Calculate the expected costs and returns, including variable and fixed costs.
__1__ Appraise the business and family goals and objectives.
__3__ Select the physical data for inputs and outputs.
__4__ Select the market prices for inputs and outputs.
__2__ Inventory the resources available for use in the farm or ranch operation. This inventory should
consider the available levels of land, labor, capital, and outputs.
Continued on next page >>>>
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 3
Problem 2- Budgeting (continued from previous page)
c. All budgeting involves one or more of these five fundamental economic principles. Write a (+) for each
principle that is state correctly and a (0) if the principle is stated incorrectly. (2 point each)
__+__ Invest in a different product if the return is greater. Substitute one product for another as long as the
value of the added output is greater than the value of the output you replaced. The cost must remain
__+__ Invest money where it will earn the highest returns. If you have limited resources, use each unit of
resource where it will give the greatest returns.
__+__ Discount for time and risk. When different alternatives involve different time periods and/or elements
or risk, base comparisons on discounted values.
__0__ Invest more if the returns decrease. Add units of an input as long as the value of the resulting output
is less than the added costs of the inputs.
__+__ Invest as little as possible in costs. Substitute one input for another as long as the cost of the added
input is less than the cost of the input, which is replaced. The output must be maintained.
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 4
Problem 3- Investment Analysis or Time Value of Money (24 points)
PV = FV / (1 + r)n
PV= Present Value ROUND-OFF decimals to the
FV= Future Value nearest cent ($1594.38775
r= interest or discount rate rounds off to $1594.39)
n= number of years
Use the table above or the formula in the box above to calculate the values for each question a. thru d. Write
your answer(s) in the blank(s) provided for each question. Show your calculations (use the back of pages if
Jason and Pam Wells have been considering the purchase of a new tractor. After many comparisons, the Wells
decided on a tractor with a purchase price of $60,000. The financing terms included a 30% down payment with
the balanced financed with annual payments over five years at 8% annual percentage rate. The Wells are in the
25% income tax bracket and use a 6% discount rate. The following table summarized the proposed tractor
purchase (over the eight years) and takes into account the $18,000 down payment, principal payments, interest
payments depreciation, tax consequences to shows CASH FLOW for each year in column A.
a. Calculate the present value of the cash flows of the tractor purchase. Write your answers in the blanks in
column B. (1 point for each blank = 11 points total).
Proposed Tractor Purchase
Year A. Cash Flow B. Present Value Cash Flow
0 $(18,000.00) $(18,000.00)
1 $(8,073.50) $(7,689.20)
2 $(6,953.70) $(6,188.79)
3 $(7,723.36) $(6,484.53)
4 $(8,307.38) $(6,580.28)
5 $(8,482.92) $(6,339.28)
6 $1,837.50 $1,295.44
7 $1,837.50 $1,222.12
8 $919.50 $576.89
Continued on next page>>>
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 5
Problem 1- Investment Analysis or Time Value of Money (continued from previous page)
b. What is the present value of the cash flows of the tractor purchase?
Total present value = $ ________$(48,187.63)_____________ (5 points)
A financial lease for the same tractors can be negotiated with the dealer for 8 years with an annual lease payment
c. What the total present value of the lease payments?
Total present value = $ ________$(61,942.76)_____________ (5 points)
$9.975 * 6.2098 = $61,942.76
d. Which is the best option for the Wells (disregard tax implications)?
Circle the correct answer. (5 points)
A. Lease the tractor
B. Purchase the tractor
C. No difference between leasing and purchasing
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 6
Problem 4- Cost and Return Analysis (25 points)
The principle of diminishing returns states that as an input is added in production, the output will increase
at an increasing rate (stage 1), then at a decreasing rate (stage 2), and finally decline (stage 3). A farm
business manager must determine the amount of input that will maximize production and not decrease
Total Product = the output (production) that can be achieved with the various levels of inputs
Average product = total product divided by the amount of input
Marginal Product = the change in total product for a change in input
Value of Marginal Product = marginal product x price of the product
Barlowe is deciding the amount of fertilizer that should be applied to the corn to provide the maximum yield/
The expected yield when various amounts of fertilizer are applied has been estimated from past experience with
growing corn. Fertilizer costs 19 cents per pound. And corn is projected to sell at $2.50 per bushel.
Use the information to complete the table and answer questions 1-3 below.
Pounds of yield Value of
Marginal Marginal Average Marginal
fertilizer per Corn Marginal
Input Cost Product Product
acre bushels per Product
0 75 None None x x x
50 85 50 $9.50 1.70 10 $25.00 40
100 92 50 $9.50 0.92 7 $17.50 28
150 97 50 $9.50 0.65 5 $12.50 20
200 100 50 $9.50 0.50 3 $7.50 12
250 98 50 $9.50 0.39 -2 -$5.00 -8
(1 point for each correct answer calculated and filled in on the table)
1. For Barlow, at what level of fertilizer uses does stage 3 of the production function begin?
250 pounds of fertilizer per acre (5 points)
2. How much fertilizer should Barlowe apply the corn?
150 pounds of fertilizer per acre (5 points)
3. With all the talk about ethanol and the need for more corn to use in manufacturing ethanol, the expected price
of corn increases to $4.00 per bushel. Now, how much fertilizer should Barlowe apply the corn?
200 pounds of fertilizer per acre (5 points)
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 7
Problem 5- Sales (income) and Expenses (costs)(25 points)
Farm businesses revolve around sales (income) and expenses (costs). Every financial statement contains information
regarding sales and expenses, and that information provided the basis of farm business management decisions.
a. Identify each of the following items at either sales (income) or expenses (costs). Write “S” for sales and
“E” for expenses. (2 points each)
Write S or E
S Cash rent received from tenants
E Feed purchased
S Government payments received
E Hired Labor paid
S Custom harvest work done for another farm
b. There are two main areas A or B C in the table.
In column A mark whether each item is farm “F” or non-farm “N”
In column B or C mark X whether the item is income or expense or an asset or a liability
[For example- 400 acres of land is farm “F” and an asset “X”;
Spouse’s salary from job in town is non-farm “N” and income “X”
(1/2 point for each correct identification)
A B or C
Income Expense Liability
400 acres of land
from job in town
Custom harvest for
Outstanding loan for
2 tons of grain for
personal car loan
Sale of wheat crop
Barn used for
Rent received from
house in town X
Fertilizer for wheat
Loan for new kitchen
Fishing boat for
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 8
Problem 6- Enterprise Budgeting (23 points)
Enterprise budgets are projected costs and returns associated with one production process; usually for one production period.
Developing and analyzing enterprise budgets is useful when planning future projects. They help predict the profitability of an enterprise
in an upcoming production period. Still profitability is not assured in any enterprise budget because estimated costs, production and
prices can change…
a. Complete the enterprise budget for wheat (1 point each blank. Four blanks in table.)
WHEAT- 2007 projected costs and returns per acre
Units Quantity Price Value
Custom Fertilizer acre 1 $4.75 $4.75
Fertilizer acre 1 $41.00 41.00
Pesticides acre 1 $20.24 20.24
Seed pounds 60 $0.11 6.60
Crop Insurance acre 1 $10.75 10.75
Machine Labor hours 3.36 $10.70 35.95
Irrigation Labor hours 5 $6.55 32.75
Fuel and Lube acre 1 $15.17 15.17
Machinery Repair acre 1 $17.82 17.82
Interest on Operating Capital dollars 90 $0.0425 3.83
Total Operating Costs $188.86 (1pt)
Depreciation and Interest acre 1 $40.00 $40.00
Property Taxes acre 1 $14.30 14.30
Property Insurance acre 1 $2.41 2.41
General Overhead acre 1 $9.55 9.55
Total Fixed Costs $66.26 (1pt)
Wheat bushels 47 4.25 $199.75 (1/2pt)
Total Receipts $199.75 (1/2pt)
b. Calculate the return above total operating costs for the wheat enterprise.
Return above total operating costs = _____$10.89_____/acre (4 points)
c. Calculate the return above all costs for the wheat enterprise.
Return above all costs = _____$(55.37)_____/acre (4 points)
d. Calculate the Breakeven Price to cover total costs for the wheat enterprise.
Breakeven Price to cover total costs = _____$5.43_____/bushel (4 points)
e. Calculate the Breakeven Yield to cover total costs for the wheat enterprise.
Breakeven Yield to cover total costs = _____60_____bushels (4 points)
f. Using this information, should the farm manager plan on producing wheat? (1 point each)
Circle the correct answer.
In the short run: Yes No Yes, in the SHORT RUN wheat covers total operating costs (VARIABLE).
In the long run: Yes No No, in the long run wheat does not cover VC + FC = TC
Assuming that that estimated costs and production are accurate.
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 9
Problem 7- Balance Sheet and Its Analysis (31 points)
PART A: McCall Davis, owner of Carolina Farms, has asked that you help with the preparation of the BALANCE
SHEET for March 1, 2007. Use the following information to construct the balance sheet for Carolina Farms.
Farmers Bank Stock (held for last 10 years) $1,000
Retirement Account $89,000
Breeding Livestock $45,000
Market Animals $13,500
Accounts Receivable $1,750
Current month’s fuel bill $750
Land (300 acres valued at $500 per acre) $150,000
Hay and Feed $10,000
Accounts Payable $4,250
Pre-paid fertilizer $4,200
Land Loan: Annual payment on July 1. 7% interest, $7200 fixed
principal payment every year. $225,000 is the principal balance
as of July 1, 2006
Cash Payment $7,200 and Accrued Interest $10,500
Pick-up Loan: 5% interest, $2,500 annual principal payment
every year. Payment due on July 1. $10,000 is the principal
balance as of July 1, 2006
Cash Payment $2,500 and Accrued Interest $250
Balance Sheet for
_______________March 1, 2007___________ (1 point) <<<<Date Information for this Balance Sheet
Current Assets Current Liabilities
Cash $15,000 Accounts Payable $4,250
Savings $8,200 Fuel Bill $750
Accounts Receivable $1,750 Cash Payment Pick-up Truck $2,500
Market Animals $13,500 Accrued Pick up interest $250
Hay and Feed $10,000 Cash Payment Land Loan $7,200
Pre-Paid Fertilizer $4,200 Accrued Land Interest $10,500
Non-Current Assets Non-Current Liabilities
Machinery $125,000 Pick-up Truck Loan Balance $7,500
Breeding Livestock $45,000 Land Loan Balance $217,800
Farmers Bank Stock $1,000
Retirement Account $89,000
Total Assets $487,650 (1/2 point) Total Liabilities $250,750 (1/2 point)
Net Worth $236,900 (1/2 point)
Net Worth + $487,650 (1/2 point)
(1/2 point for each correctly identified asset or liability [24 blanks])
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 10
Problem 7- Balance Sheet and Its Analysis (continued from previous page
1. Is Carolina Farms solvent? (4 points)
____don’t know, not enough information provided.
2. How do you know? (4 points)
assets are greater than liabilities
3. Is Carolina Farms liquid? (4 points)
____don’t know, not enough information provided.
4. How do you know? (5 points)
Current assets are greater than current liabilities
The current ratio is a measure of liquidity. It determines the ability of the
farm business to meet short-term debt and other obligations from
available cash. It’s the ratio of current assets to current liabilities.
The debt/equity ratio is a measure of solvency. It’s the ratio of total
liabilities to owner’s equity.
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 11
Problem 8- Partial Budgeting (24 points)
Normal, a farmer in eastern North Carolina is thinking about changing the farm’s crop mix. It’s usually 450 acres
of corn and 300 acres of soybeans. But is considering a change to planting 500 acres of soybeans and 250 aces
of corn this year. Corn prices are projected to be $4.15 per bushel; Soybeans are projected to bring $7.80 per
bushel. Normal’s ten-year average yields are 105 bushels per acre for corn and 32 bushels per acre for
soybeans. Normal has calculated the cost of production for corn is $190 per acre and the cost of production for
soybeans is $125 per acre.
Note: Write “none” or “zero” in any category with no entry. Round answers to two decimal places.
Complete the partial budget form:
A change to planting 500 acres of soybeans and 250 aces of corn this year.
Added Returns: Reduced Returns:
Soybean 500 * 32 * $7.80 = $124,800 Soybean 300 * 32 * $7.80 = $74,880
Corn 250 *105 * $4.15= $108,937.50 Corn 450 *105 * $4.15= $196,087.50
Subtotal $ 233,737.50
Subtotal $ 270,967.50
Reduced Costs: Added Costs:
Corn 450 * $190 = $85,500 Corn 250 * $190 = $47,500
Soybeans 300 * $125 = $37,500 Soybeans 500 * $125 = $62,500
Subtotal $ 110,000
Subtotal $ 123,000
Total AR + RC $ 356,737.50 (5) Total RR + AC $ 380,967.50 (5)
Net Change $ (24,230.00) (5 points)
Should the change be implemented? Circle the correct response. (9 points)
Yes No because income is less by $24,230
End of Problem Solving Section of 2007 FBM CDE
North Carolina FFA Farm Business Management CDE – 2007 KEYcorr page 12