PARTIAL BUDGET ANALYSIS
Partial budget analysis example of changing product mix from specialty green beans to salad
greens.
Positive Effects
Increases in revenue (1)
Sales of salad greens
$150.00
Negative Effects
Decreases in revenue (3)
Sales of specialty green beans
Decreases in cost (2)
18.25 hrs of labor @ $10 per hr
Input & packaging costs
Total decrease in costs
$182.50
26.66
$209.16
Increases in cost (4)
2.8 hrs of labor @ $10 per hr
Input and packaging costs
Total increase in costs
Total positive effects (5)
$359.16
Total negative effects (6)
Net change (7)
-$37.37
$360.00
28.00
8.53
36.53
$396.53
Substituting salad greens for specialty green beans reduces income by $210 per bed, from
$360 from specialty green bean sales to $150 for salad green sales. Labor requirements and
input and packaging costs, however, would be lowered by $172.62 per bed, primarily due to the
lower labor requirements for salad greens compared to specialty green beans. Total negative
effects outweigh total positive effects by $37.37 per bed, indicating the change from specialty
green beans to salad greens would reduce farm profit. Non-economic considerations such as
labor (note that specialty green beans require 15.45 more hours per bed), as well as other
considerations, will have to be taken into account prior to discarding the proposed change.
Exercise #1 Marketing outlet evaluation
You sell most of your produce at a regional urban farmers’ market. You have often wondered
what marketing outlet should be used to sell your remaining production, a smaller rural farmers’
market (your current marketing strategy) or institutional market? You currently sell into the rural
farmers’ market.
The rural farmers’ market in your area occurs once per week, requires one person for 6 hrs.
($60 at $10 per hour), supplies expense of $20 per week, and transportation cost of $20 per
week. Your alternative marketing outlet would be selling to a local institutional buyer. You
determine the mileage to be the same at $20 per week, labor is 4 hrs. per week ($40 at $10 per
hour), and supplies are $10 per week.
Assume your farms sales for the farmer’s market is $4,500 for the season ($225 per day). It is
estimated sales revenue would be 20 percent lower for the institutional market than for the
farmers’ market due to lower sales prices. Develop a partial budget to evaluate the two
marketing outlets.
Partial budget analysis of changing marketing outlets.
Positive Effects
Negative Effects
Increases in income (1)
Decreases in income (3)
Institutional market sales
$3,600
Farmers’ market sales
$4,500
Decreases in costs (2)
Farmers market labor costs
Farmers market supply costs
Total decrease in costs
$1,200
400
$1,600
Increases in costs (4)
Institutional market labor costs
Institutional market supply costs
Total increase in costs
$800
200
$1,000
Total positive effects (5)
$5,200
Total negative effects (6)
$5,500
Net change (7)
-$300
Ans:
(1) Increase in income – institutional sales of $3,600
(2) Decrease in costs - eliminating the farmers’ market would reduce marketing costs
$1,600, $1,200 in labor (6 hrs x $10 per hour x 20 weeks) and $400 in supplies ($20 per
week for 20 weeks).
(3) Decrease in income – farmers’ market sales of $4,500
(4) Increase in costs - implementing the institutional market would incur costs of $1,000,
labor costs of $800 (4 hrs x $10 per hour x 20 weeks) and supply costs of $200 ($10 per
week for 20 weeks). NOTE that transportation costs were ignored because they were
the same for both markets at $20 per week.
(5) – (7) the negative effects (costs) of $5,500 overcome the reduction in positive effects
(revenue) of $5,200 indicating a change should not be made based solely on economic
reasons. Depending on how important the non-economic and other factors are in
comparing these two marketing outlets, it may still make sense to sell into the
institutional market.
Exercise #2 – Machinery investment evaluation
You currently harvest your potatoes by hand and it takes about 100 hours at $10 per hour per
acre. You estimate that a one-row potato harvester could harvest one acre in about 2 hours.
The cost of a new harvester is $2,000 and has an estimated life of 7 years.
The depreciation cost for this equipment is the sales price minus the salvage value (or the price
you could sell the piece of equipment for at the end of the 7-year period) divided by the useful
life of the equipment. For this example, you have a $2,000 purchase price minus zero salvage
value divided by the 7-year life equals an annual depreciation cost of $286 per year. NOTE that
the salvage value of zero assumes your potato harvester is not worth anything at the end of the
seven years. This is probably not what would actually happen if you chose to sell your
harvester, but it is a conservative approach to making this decision.
In addition to depreciation costs, you have additional fixed and variable costs associated with
your potato harvester. The fixed costs (those that don’t vary by usage) would include taxes,
housing, and insurance. It is estimated the fixed costs are 1% of the purchase price, or $20 per
year. The variable costs (those that increase or decrease with usage) would be repairs and
maintenance. The variable costs are estimated at 2% of the purchase price, or $40 per year.
Your actual fixed and variable costs can differ substantially from these estimates from year-toyear. Keeping good records on repairs and maintenance, as well as fixed costs such as
insurance and building (housing) costs will allow you to be more accurate when estimating
these costs. Develop a partial budget to evaluate the purchase of the potato harvester.
Partial budget analysis of new 1-row potato harvester ($2,000, 7-yr life) purchase.
Positive Effects
Negative Effects
Increases in income (1)
Decreases in income (3)
Decreases in costs (2)
Labor costs (100 hours)
$1,000
Total decrease in costs
Total positive effects (5)
Net change (7)
$1,000
Increases in costs (4)
Labor (2 hour)
Depreciation cost
Taxes, housing, insurance (1%)
Repairs and maintenance (2%)
Total increase in costs
$20
$286
20
40
$366
$1,000
Total negative effects (6)
$366
$634
Ans.:
(1) and (3) do not need to be filled in because no change in income is assumed.
(2) Decrease in costs – hand harvesting potatoes takes 100 hours @ $10 per hour
(4) Increase in costs – machinery harvest labor takes about 2 hours @ $10 per hour. Total
depreciation is $286 whereas taxes, etc. is $20 and repairs and maintenance is $40 for a
total increase in costs of $366.
(5) – (7) The net change would be a positive $634 indicating you would increase your farm
profitability by replacing hand labor for potatoes with a potato harvester.
Exercise #3 Alternative livestock production system evaluation
You sell most of your livestock at a local sales barn as conventional. You have often wondered
if you could make more money by producing and marketing your livestock as “natural”.
You assume the cost of the feeder cattle, health products, and some of the other minor costs to
be the same. You ignore these costs for partial budgeting purposes.
Your current conventional diet is $400 per finished cattle and the natural diet is estimated at
$500. Current housing cost is $80 per head and is estimated at $85 for the natural finished
animal. You budget your conventional cattle revenue per head at $1,080 (1200 lbs. at $.90/lb.)
whereas you estimate natural finished cattle to bring in $1,150 (1150 lbs. $1.00/lb.). Develop a
partial budget to evaluate whether to change your cattle production practices.
Partial budget analysis of changing cattle production practices.
Positive Effects
Negative Effects
Increases in income (1)
Decreases in income (3)
Natural market sales
$1,150
Conventional market sales
Decreases in costs (2)
Conventional feed
Conventional housing
Total decrease in costs
Total positive effects (5)
Net change (7)
Ans:
(1)
(2)
(3)
(4)
(5)
$1,080
$400
80
$480
Increases in costs (4)
Natural feed
Natural housing
Total increase in costs
$500
85
$585
$1,630
Total negative effects (6)
$1,665
-$35
Increase in income – natural market sales is $1,150 (1,150 lbs. @ $1.00 per lb.)
Decrease in costs – no longer feeding conventional feed housing for fewer days on feed.
Decrease in income – conventional market sales is $1,080 (1200 lbs. @ $.90 per lb.)
Increase in costs – natural feed is now $500 per head and housing is $85.
– (7) the positive effects of $1,630 or overcome by the negative effects of $1,665
resulting in a small negative change of $-35 per head. Depending on how important the
non-economic and other factors are in comparing these two production systems, the
economic analysis is virtually a toss-up.