Solved: A South American farms 960 hectares of land on

which
A South American farms 960 hectares of land on which

A South American farms 960 hectares of land on which he grows squash, kale, lettuce and
beans. Of the total, 680 hectares are suitable for all four vegetables, but the remaining 280
hectares are suitable only for kale and lettuce. Labour for all kinds of farm work is plentiful.

The market requires that all four types of vegetable must be produced with a minimum of 10 000
boxes of any one line. The farmer has decided that the area devoted to any crop should be in
terms of complete hectares and not in fractions of a hectare. The only other limitation is that not
more than 227 500 boxes of any one crop should be produced.

Data concerning production, market prices and costs are as follows:

Fixed overhead per annum:

Growing.................... 122 000

Harvesting.................... 74 000

Transport.................... 74 000

General administration... 100 000

Notional rent....................74 000

It is possible to make the entire farm viable for all four vegetables if certain drainage work is
undertaken. This would involve capital investment and it would have the following effects on
direct harvesting costs of some of the vegetables:

The farmer is willing to undertake such investment only if he can obtain a return of 15 per cent

DCF for a four-year period.

You are required to:

(a) Advise the farmer, within the given constraints:

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 (i) the area to be cultivated with each crop if he is to achieve the largest total profit;

(ii) the amount of this total profit; (iii) the number of hectares it is worth draining and the use

to which they would be put.

(b) Comment briefly on four of the financial dangers of going ahead with the drainage work.

Show all relevant calculations in arriving at your answer. Ignore tax and inflation.

A South American farms 960 hectares of land on which

ANSWER
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