March 5, 2009
Name:______Participant # ______
2009
North Carolina FFA
Farm Business Management
Career Development Event
Junior Division
Problem Solving (200 points)
Please check carefully to see that you have 6 pages including this cover page.
You have90 minutes to complete this section of the event.
prepared by
Dr. Phil Hamilton, Director
The Lois G. BrittAgribusinessCenter
MountOliveCollege
634 Henderson St.
Mount Olive, North Carolina 28365
919.658.2502
in cooperation with
Department of Agricultural and Extension Education
College of Agriculture and Life Sciences
North Carolina State University
1a. Recognizing variable costs and fixed costs:
Listed below are the different items needed to produce a crop of strawberries in eastern NC These items are from an enterprise budget for strawberries.Beside each item, indicate with a checkmark ( ) whether the costs associated with that item are classified as variable or fixed. [The first item is answered for you as an example] (22points)
Items needed to produce strawberries in eastern NC / Variable Cost / Fixed CostSeed /
Annual operating capital
Depreciation, taxes, insurance on machinery and land
Shipping cartons to hold strawberries
Custom harvesting and sorting
Other labor
Farmer’s Market display
Disposal of plastic
Fertilizer and lime
Website development
Herbicide, insecticide, fungicide
Machinery fuel, lubricants & repairs of equipment
1b. Recognizing assets and liabilities
Indicate whether the following entries on a farm business’ balance sheet would be classified as assets or liabilities. Beside each item, indicate with a checkmark () whether the entry would be are classified as an asset or a liability. [The first item is answered for you as an example] (10 points)
Entry / Asset / LiabilityTractor Shed
The farm’s feed bill at the local farm supply store
A 20-year farm mortgage contract with a local agribusiness lender
A 36-month certificate of deposit at the local bank
Newborn Meat Goats
2. Using partial budgeting to make a decision about a farm business.
Proposed Change:
To give up the greenhouse business and take a bank job in town.
Use partial budgeting techniques to help the Raine’s decide whether Jane should give up her greenhouse business to take a job in town. The local bank has offered Jane an agricultural loan officer job that would pay $35,000 per year.
The new job will allow the Raine’s to drop their current $600/month health insurance and enroll in the bank’s health plan at a cost of $250/month. Currently, Jane contributes $10,000/yearin net greenhouse sales and $2,100/year from her substitute teaching job to the farm cash flow. The farm would have to give up both of these amounts if she takes the bank job.
The Raine’s would have to purchase better transportation for Jane. They can get a $239 per month lease on an automobile that gets 40 miles per gallon. It’s a 50-mile/day round trip to the bank, Jane will work 250 days/year and gas, lube, and insurance are estimated at 20 cents per mile. Jane knows that the new job would require a wardrobe upgrade so she’s factored in a $150/month clothing allowance. Since Jane won’t be able to help out on the farm, an additional $5,000 of hired labor will be necessary annually.
Complete the partial budget on an ANNUAL pre-tax basis to determine whether the Raine’s will "be better off financially if Jane takes the bank job. Note: Write “none” or “zero” in any category with no entry. Round answers to the nearestdollar. (3 points each)
Added Returns:Subtotal $______/ Reduced Returns:
Subtotal $______
Reduced Costs:
Subtotal $______/ Added Costs:
Subtotal $______
Total AR+RC$______/ Total RR+AC$______
Net Change $______
- What is your recommendation to the Raine’s? (Circle the correct response) (10 points)
Give up the greenhouse business and take a bank job in town
Continue the greenhouse business
- How much would the bank salary have to change in order to change the recommendation?(Circle the correct response) (10 points)
- Approximately $35,000.
- Approximately $15,000.
- Approximately $12,000.
- The recommendation will not change regardless of the bank salary.
Problem 3 – Projected Cash Flow (40 points)
The Bledsoe farm business consulted their farm business advisor in preparing a projected cash flow for 2009.
A. The following list of 10 items are related to the Bledsoe farm business. They are not sure if they should be included in the projected cash flow. Indicate with a (+) for those items that should be included in the projected cash flow and a (0) for those items that should not be listed on their projected cash flow. (2 points each)
1. Value of the exchange of fuel for labor ______
2.Equity in 2008 crops listed on ending inventory______
3. New term loan for purchase of machinery ______
4. Feed purchased for this year ______
5.Cost of purchased packaging for pasture-based beef ______
6.Payment of real estate tax______
7. Cost of livestock purchased for resale ______
8.Paid family labor______
9. End of the year accrued interest due on a machinery loan ______
10. Ending inventory value of purchased machinery ______
B. In constructing the projected cash flow, identify where selected items should be found. Select the best answer from cash flow categories A thru Oand write that letter in the correct blank beside the items listed 1 thru 10below. Categories may be used more than once. Assume that the equity = sales price. (2 points each)
______1. Sales from pasture-based beef products
______2. Accounting software for farm business
______3. Principal payment on operating loan
______4. Difference between cash outflows and inflows
______5. Tuition paid for training
______6. Interest paid on operating loan
______7. Payment of sales tax on personal expenses
______8. Depreciation of machine storage building
______9. Cash received from a loan
______10. Spouse salary from bank
Cash Flow Categories
A. Operating Receipts
B. Capital Sale
C. Operating Expenses
D. Overhead Expenses
E. Non-farm Income
F. Family Living
G. Cash Position
H. Cash Difference
I. Accrued Interest
J. Interest Payments
K. Total Cash Outflow
L. Sources of Cash
M. Net Cash Flow
N. Principal Payments
O. Not on a Projected Cash Flow
Problem 4 - Cash Flow Analysis (60 points)
Sarah and Craig are retiring from their city jobs and are moving to the country to enjoy owning and operating a small farm business. They have located a 160-acre farm that is for sale at $2,000 per acre or a total of $320,000. Sarah and Craig have identified some enterprises for their new farm and have projected the cash income for the 160 acres. The table below summarizes the cash flow they can expect for the first five years.
SIMPLIFIED Cash Flow Analysis of the purchase of 160-acre farm at $2,000 per acre for years 1-5Year 1 / Year 2 / Year 3 / Year 4 / Year 5
Cash operating income $ / 40,250 / 40,250 / 40,250 / 40,250 / 40,250
Cash operating expenses $ / 18,750 / 18,750 / 18,750 / 18,750 / 18,750
Annual loan payment* $
Principal $ / 6,500 / 6,500 / 6,500 / 6,500 / 6,500
Interest $ / 13,650 / 13,195 / 12,740 / 12,285 / 11,830
Total cash outflow $ / 38,900 / 38,445 / 37,990 / 37,535 / 37,080
Net cash flow $ / 1,350 / 1,805 / 2,260 / 2,715 / 3,170
*Assumes a down payment of $125,000 with the balance financed by a 30-year loan of $195,000 at 7% interest with equal principal payment made annually.
Does the multi-year cash flow indicate a positive or negative trend?
$ ______(10 points)
True-False Questions. Circle T or F beside each statement. (10 points each)
T F / 1. Depreciation is NOT included in cash operating expenses.T F / 2. For year 1-5, the cash operating income is enough to meet cash operating expenses and the required principal and interest payments.
T F / 3. Because of the interest payment, the net cash flow will never be positive for Sarah and Craig.
T F / 4. The cash flow would have deficits in some years if the annual principal payment was increased by $2,000.
T F / 5. For the Sarah and Craig, a cash flow projection for the entire farm business is neither needed nor relevant in determining if cash will be available to make the payments. Each part of the farm business should be kept separate.
2009 NC FFA Farm Business Management CDE JUNIOR DIVISION page 1