Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 66

CVP Analysis Hemp, an agricultural product, is a natural fiber that has many industrial and commercial uses, including handbags, backpacks, hats, paper, rope, industrial fabrics, and clothing. In some areas of the world, particularly Australia, Canada, and the United States, hemp is viewed as a potentially significant new opportunity for agricultural production, and business and agricultural leaders are studying the strategic issues involved in making further investments in the crop. For example, an agricultural analysis by the Manitoba, Canada, Department of Agriculture has developed the following estimated costs for producing hemp. This analysis is based on an average farm in which 180 acres would be planted. Assume machinery operating costs, crop insurance, land taxes, licensing fees, sampling and analytical fees, and other costs are fixed relative to the production of hemp, while the other costs are variable per pound produced. Also, assume seed prices of $4.00 per pound, a 20-pound per acre seeding rate, and crop yield of 400 pounds per acre. The costs associated with investment in land and machinery are ignored in the analysis, on the assumption that these costs would remain the same whether or not the farmer grows hemp.

Required Calculate the price per pound that a farmer on an average-sized farm would have to receive to break even on the production of hemp.

Estimated Operating Costs per Acre for the Production of Hemp
Seed	$80.00
Fertilizer	38.15
Chemicals	10.00
Fuel	11.00
Machinery operating costs	15.00
Crop insurance	6.00
Other costs	7.50
Land taxes	5.50
Licensing fee	15.00
Sampling and analytical fees	15.00
Drying costs	3.57
Cleaning costs	5.00
Interest on operating costs	7.44

Step 1 of 3

Breakeven Point in Units

The breakeven point also known as the breakeven level is can be defined as that level of operations where the company’s revenue is just enough to meet its costs. It is the point at which the company makes no profit no loss and just meet its costs. The breakeven point has a profit equal to zero and revenues exactly equal to the total of variable and fixed costs incurred by the company.