Agricultural Economics and Rural Sociology and Rural Sociology The Agribusiness ManagementSimulation...

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Agricultural EconomicsAgricultural Economics and Rural Sociologyand Rural Sociology

The AgribusinessThe AgribusinessManagementManagementSimulationSimulation

John Foltz and Leroy John Foltz and Leroy StodickStodick

The Agribusiness ManagementThe Agribusiness ManagementSimulationSimulation

Computer simulation of Computer simulation of business environmentbusiness environment

Firms attempt to achieve Firms attempt to achieve management goalsmanagement goals

The Agribusiness ManagementThe Agribusiness ManagementSimulationSimulation

Management teams encounter Management teams encounter a market:a market:

Partly predictablePartly predictable

Also marked with uncertaintyAlso marked with uncertainty ??

Firms compete to purchase raw material A, Firms compete to purchase raw material A, used in production of finished products B used in production of finished products B and Cand C

Also marked with uncertaintyAlso marked with uncertainty ??

DecisionsDecisions Each team makes management Each team makes management

decisions concerning:decisions concerning:

ProductionProduction InsuranceInsurance

ProductionProduction

PricingPricing

InsuranceInsurance

WorkforceWorkforce

ProductionProduction

PricingPricing

AdvertisingAdvertising

InsuranceInsurance

WorkforceWorkforce

ExpansionExpansion

ForSale

ObjectivesObjectives Develop an understanding of market Develop an understanding of market

forces which characterize forces which characterize competitive business environment.competitive business environment.

PP DD SS

SalesCOGS

ExpensesSalariesUtilities

Net Profit

ObjectivesObjectives Develop an understanding of market Develop an understanding of market

forces which characterize forces which characterize competitive business environment.competitive business environment.

Enhance ability of using tools such as:Enhance ability of using tools such as:

Balance SheetBalance Sheet

Financial RatiosFinancial Ratios

P &L StatementP &L Statement13,2001,467

58,96973,636

5,35019,24524,595

798,200523,467

173,63635,23265,865

DebtsAssets

PP DD SS

ObjectivesObjectives

Hone teambuilding skills.Hone teambuilding skills.

Instructor VariablesInstructor Variables

1. Business cycle – will vary through the following range:1. Business cycle – will vary through the following range: Rapid ExpansionRapid Expansion Moderate ExpansionModerate Expansion Slight ExpansionSlight Expansion NeutralNeutral Slight ContractionSlight Contraction Moderate ContractionModerate Contraction Severe ContractionSevere Contraction

2. Short-term interest rate.2. Short-term interest rate.

2. Short-term interest rate.2. Short-term interest rate. 3. Long-term interest rate.3. Long-term interest rate.

Instructor Variables, Cont.Instructor Variables, Cont.

4. General dividend yield rate. 4. General dividend yield rate.

Firm’s yield rate > General yield rate, thenFirm’s yield rate > General yield rate, then market value of stock tends to rise, and vice versa.market value of stock tends to rise, and vice versa.

Instructor Variables, Cont.Instructor Variables, Cont.

4. General dividend yield rate. 4. General dividend yield rate.

Firm’s yield rate > General yield rate, thenFirm’s yield rate > General yield rate, then market value of stock tends to rise, and vice versa.market value of stock tends to rise, and vice versa.

5. Probability of disaster.5. Probability of disaster.

Firm VariablesFirm Variables

1. Bid price of raw material A:1. Bid price of raw material A: Firm always gets amount requested upFirm always gets amount requested up to firm’s production capacity.to firm’s production capacity. Purchase price depends on competition.Purchase price depends on competition. Local market & natl. market.Local market & natl. market. If firm is forced to buy on the natl. mkt.,If firm is forced to buy on the natl. mkt., Cost of A = natl. price + $15.00 shipping.Cost of A = natl. price + $15.00 shipping.

Firm VariablesFirm Variables

2. Bid price of finished product B:2. Bid price of finished product B: B is a fairly homogeneous product,B is a fairly homogeneous product, which has relatively elastic demand.which has relatively elastic demand.

Firm Variables, Cont.Firm Variables, Cont.

3. Price of finished product C.3. Price of finished product C. C is a differentiated product, which hasC is a differentiated product, which has relatively inelastic demand.relatively inelastic demand.

4. Quantity of A to purchase.4. Quantity of A to purchase. Cannot be more than productionCannot be more than production capacity (measured in units of A).capacity (measured in units of A).

5. % of A used in production of B5. % of A used in production of B (and implicitly % of A used in C).(and implicitly % of A used in C).

1 unit of A = .73 units B if only B produced1 unit of A = .73 units B if only B produced

1 unit of A = .65 units C if only C produced1 unit of A = .65 units C if only C produced

Increase efficiency by producing both.Increase efficiency by producing both.

Firm Variables, Cont.Firm Variables, Cont. 6. Change in unskilled labor -- takes effect6. Change in unskilled labor -- takes effect immediately:immediately: 10 initially, $15,000/yr.10 initially, $15,000/yr. If no addtl. skilled workers hired:If no addtl. skilled workers hired: each addtl. unskilled hire =each addtl. unskilled hire = + 1,000 units A capacity.+ 1,000 units A capacity. If addtl. skilled workers hired:If addtl. skilled workers hired: 1st addtl. unskilled hire = 2,000 units1st addtl. unskilled hire = 2,000 units A capacity, and each addtl. unskilledA capacity, and each addtl. unskilled hire = + 1,500 units A capacity.hire = + 1,500 units A capacity.

Firm Variables, Cont.Firm Variables, Cont. 7. Change in skilled labor -- takes effect7. Change in skilled labor -- takes effect immediately:immediately: 4 initially, $25,000/yr.4 initially, $25,000/yr. 1st addtl. hire = +3,000 units A capacity1st addtl. hire = +3,000 units A capacity 2nd addtl. hire = +2,500 units A capacity2nd addtl. hire = +2,500 units A capacity 3rd and above = +2,000 units A capacity3rd and above = +2,000 units A capacity

Firm Variables, Cont.Firm Variables, Cont. 7. Change in unskilled labor -- takes effect7. Change in unskilled labor -- takes effect immediately:immediately: 4 initially, $25,000/yr.4 initially, $25,000/yr. 1st addtl. hire = +4,000 units A capacity1st addtl. hire = +4,000 units A capacity 2nd addtl. hire = +3,000 units A capacity2nd addtl. hire = +3,000 units A capacity 3rd and above = +2,000 units A capacity3rd and above = +2,000 units A capacity 8. Change in sales personnel -- takes effect8. Change in sales personnel -- takes effect immediately:immediately: 0 initially, $40,000/yr.0 initially, $40,000/yr.

Firm Variables, Cont.Firm Variables, Cont. 9. Advertising $ for B.9. Advertising $ for B. Affects this period only. Advertising forAffects this period only. Advertising for this product is kind of like “check-off”this product is kind of like “check-off” dollars for dairy producers. Thedollars for dairy producers. The advertising $ spent help your firm, butadvertising $ spent help your firm, but also help everyone else in the industry.also help everyone else in the industry.

Firm Variables, Cont.Firm Variables, Cont. 10. Advertising $ for C.10. Advertising $ for C. Carries over some to future periods.Carries over some to future periods. Advertising affects only demand forAdvertising affects only demand for your product. You are building “brandyour product. You are building “brand equity.” In addition, the carry-over effectequity.” In addition, the carry-over effect is mimicking what happens in the realis mimicking what happens in the real world with frequency of advertisingworld with frequency of advertising building awareness and demand.building awareness and demand.

Firm Variables, Cont.Firm Variables, Cont. 11. Purchase of increased production11. Purchase of increased production capacity for A -- takes effect capacity for A -- takes effect NEXTNEXT period: period: 10,000 units initially10,000 units initially Can purchase additional capacity forCan purchase additional capacity for $60,000/unit -- $60,000/unit -- EACH UNITEACH UNIT can process can process 1000 units of A.1000 units of A.

Firm Variables, Cont.Firm Variables, Cont. 12. Purchase of new storage for B & C --12. Purchase of new storage for B & C -- takes effect next period:takes effect next period: 1,000 units capacity initially1,000 units capacity initially If inventory of B & C exceeds capacity,If inventory of B & C exceeds capacity, rent = $6.50/unit.rent = $6.50/unit. Can purchase additional 500 unitCan purchase additional 500 unit warehouse for $22,500/warehouse.warehouse for $22,500/warehouse.

13. Disaster insurance premium:13. Disaster insurance premium: $15,000$15,000

Firm Variables, Cont.Firm Variables, Cont. 14. Payment on short-term notes:14. Payment on short-term notes: Long - term debt is repaid through short -Long - term debt is repaid through short - term notes. A firm can pay up toterm notes. A firm can pay up to maximum reported on results sheet.maximum reported on results sheet.

Firm Variables, Cont.Firm Variables, Cont. 14. Payment on short-term notes:14. Payment on short-term notes: Long - term debt is repaid through short -Long - term debt is repaid through short - term notes. A firm can pay up toterm notes. A firm can pay up to maximum reported on results sheet.maximum reported on results sheet. 15. Dividends to be paid.15. Dividends to be paid.

Firm Variables, Cont.Firm Variables, Cont. 14. Payment on short-term notes:14. Payment on short-term notes: Long - term debt is repaid through short -Long - term debt is repaid through short - term notes. A firm can pay up toterm notes. A firm can pay up to maximum reported on results sheet.maximum reported on results sheet. 15. Dividends to be paid.15. Dividends to be paid. 16. Investment in money market.16. Investment in money market.

Firm Variables, Cont.Firm Variables, Cont. 14. Payment on short-term notes:14. Payment on short-term notes: Long - term debt is repaid through short -Long - term debt is repaid through short - term notes. A firm can pay up toterm notes. A firm can pay up to maximum reported on results sheet.maximum reported on results sheet. 15. Dividends to be paid.15. Dividends to be paid. 16. Investment in money market.16. Investment in money market. 17. Investment in stock market.17. Investment in stock market.

18. Consulting fees.18. Consulting fees. If your firm is really stuck for what to do,If your firm is really stuck for what to do, instructor will help for a price! instructor will help for a price!

What You DoWhat You Do

1. Each team will be given a user ID and1. Each team will be given a user ID and password, with which to access thepassword, with which to access the Agribusiness Management SimulationAgribusiness Management Simulation on the Internet. Each firm on the Internet. Each firm shouldshould decide decide who will be their data entry personwho will be their data entry person (However, all team members can access(However, all team members can access the program).the program).

What You DoWhat You Do

1. Each team will be given a user ID and1. Each team will be given a user ID and password, with which to access thepassword, with which to access the Agribusiness Management SimulationAgribusiness Management Simulation on the Internet. Each firm on the Internet. Each firm shouldshould decide decide who will be their data entry personwho will be their data entry person (However, all team members can access(However, all team members can access the program).the program). 2. The data is entered on the Internet Site,2. The data is entered on the Internet Site, and the simulation will be run at a timeand the simulation will be run at a time specified by the instructor.specified by the instructor.

What You GetWhat You Get

1. After a simulation is run, the results are1. After a simulation is run, the results are available for displaying or printing.available for displaying or printing.

What You GetWhat You Get

1. After a simulation is run, the results are1. After a simulation is run, the results are available for displaying or printing.available for displaying or printing.

2. If your instructor has not made them2. If your instructor has not made them available at the outset, Balance sheets,available at the outset, Balance sheets, income statements and financial ratiosincome statements and financial ratios will be available for viewing during awill be available for viewing during a later time period.later time period.

Examples of OutputExamples of Output

Profit and Loss Statement

Current Time Period: 10Firm 1

TncomeNet Sales

Product Units Price B 685 $128.00 $87,680.00 C 7909 $155.00 $1,225,895.00 Total Net Sales $1,313,575.00 Interest From Money Market $17,364.99 Income From Stock Market Fund $45,507.81Expenses Purchase of Raw Material $610,859.25 Sales Expense $43,985.00 Payroll $315,000.00 Warehouse Fees $8,671.00 Interest Payments $81,568.15 Depreciation $44,750.00 Other Operating Expenses $248,915.00 Total Expenses $1,353,748.38Gross Profit $22,699.40TaxesNet Profit $22,699.40

Balance Sheet

Time Period: 10Firm Number: 1Assets Liabilities Current Assets Current Liab. Cash $354,132 Accounts Pay. $50,000 Accounts Receivable $65,679 ST Notes Pay. $911,056 Inventory $74,891 Total Current Money Market Funds $396,048 Liabilities $961,056 Stock Market Funds $320,000 LT Notes Pay. $312,152 Total Current Assets $1,210,750 Total Liab. $1,273,208 Fixed Assets Net Worth Land $250,000 Capital Stock $1,000,000 Buildings $300,000 Retained Earn. $15,042 Less Acc. Depn. $110,000 $190,000 Total Net Worth $1,015,042 Storage Fac. $67,500 Less Acc. Depn. $6,000 $61,500 Mach. & Equip. $150,000 Less Acc. Depn. $88,000 $62,000 Production Fac. $780,000 Less Acc. Depn. $266,000 $514,000 Total Fixed Assets $1,077,500 Total LiabilitiesTotal Assets $2,288,250 and Net Worth $2,288,250

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Agricultural Economics and Rural Sociology and Rural Sociology The Agribusiness ManagementSimulation...

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