Agricultural Economics and Farm Management
Agricultural Economics and Farm Management tests whether you can classify costs correctly, compare enterprises on a common basis, and judge a plan by its margin rather than its gross output.
Core rules
- Fixed costs (land rent, depreciation, permanent labour, interest on capital) do not change with output in the short run; variable costs (seed, fertilizer, casual labour, fuel, pesticides) do.
- Gross margin (GM) = gross output − variable costs. It is the correct tool for choosing among enterprises sharing the same fixed costs. Profit = GM − fixed costs.
- Benefit–cost ratio = total benefits ÷ total costs; a BCR above 1 is acceptable, but it ignores scale.
- Break-even yield = total cost ÷ price per unit; break-even price = total cost ÷ expected yield.
- Straight-line depreciation = (purchase price − salvage value) ÷ useful life.
Worked example
One hectare of chilli: yield 8 000 kg at Rs 120/kg = Rs 960 000. Variable costs: seed 40 000, fertilizer and chemicals 260 000, hired labour 300 000 = Rs 600 000. GM = 360 000. Fixed costs: land rent 120 000 plus depreciation 30 000 = 150 000, so profit = 210 000. BCR = 960 000 ÷ 750 000 = 1.28. Break-even yield = 750 000 ÷ 120 = 6 250 kg, so the crop can lose about 22 % of yield before it makes a loss.
Traps that cost marks
Deducting fixed costs in a GM comparison; ignoring unpaid family labour and own land as opportunity costs; treating a capital purchase as a single-year variable cost; mixing cash flow with profitability.