AGBUS 180A

W09 Guided Practi ce - Developing an Enterprise Budget

The first thing that Michael must do to develop his enterprise budget is to identify the revenue
elements and the required inputs, the amount of each input, and the cost of each is in the budget.

Revenue elements (to be used in the revenue section of the pineapple enterprise budget): His
production of pineapple juice is measured in batches—the total amount that he can process in
one day. Each batch is 285 gallons (1,079 liters) of juice. Michael sells the juice to distributors in
one-gallon bottles and charges $9 per bottle. He has provided the list of inputs in the following
table:

Table 9.3 Fixed and Variable Inputs for Pineapple Juice Production

In the list of inputs, note the amount of each input that Michael needs to produce one batch of
fresh pineapple juice. In addition, note the cost of each unit price input.

After gathering the information, Michael wants to utilize the following blank enterprise budget to
determine if his fresh juice enterprise is financially feasible or not.

The format of Michael's enterprise budget is similar to Peter's budget. Note the rows and
columns of the enterprise table. The title of the enterprise is given in cell A1. The “Revenue”
section is found in row 5. The expenses are in rows 8 and 34.

Your assignment is to complete this enterprise budget and the breakeven table to identify if
Michael's fresh pineapple juice enterprise is profitable or not.
  

Completing the Revenue Section

1. Begin by entering the appropriate information for cells C8 and D8.
1. In cell C8 for example, you should have entered "9" for the market price per
gallon. (Recall that the market price was given in the paragraph prior to Table
9.3.)
 2. In cell D8, enter the total units, or gallons, of juice that is processed in one batch.
2. In cell E8, enter a formula that will give you the total revenue, in other words total value
per batch. (Recall that you learned about formulas in Week 05.) What formula did you
use? [1] (Hint: See the footnote at the bottom for the answer.)
3. After you entered the formula, the total value per batch (in cell E8) should have been
$2,565. Is that the value in cell E8 of your spreadsheet? Yes? Congratulations, you have
entered the first three values and formula correctly! No? Check the formula you entered
in E8 and compare it with the hint at the bottom of the page.

Completing the Expenses Section

Note that this section will have two parts, one for variable expenses and one for fixed expenses.
You should reference the information in Table 9.3 for both.

Variable Expenses

1. In row 13 of the “Variable Expenses” section, enter the information for the first input:
propane. The following instructions will get you started. Make the following changes:
o A13 enter the name of the input: Propane
o B13 enter the unit measuring the input, for example, liter
o C13 enter the price per unit of the input: 153.33
o D13 enter the number of units of the input used: 1.5
o E13 enter the formula that will give the total value of the input. (Hint: Look again
at the formula at the bottom of the page.)
2. Repeat Step 1 for each of the variable inputs in Table 9.3. (Refer to Table 9.1 Peter’s
enterprise budget for producing fresh tomatoes as an example.)
3. Total Variable Costs. In cell E23, enter a formula that will sum all of the total value per
batch entries of the variable inputs. (Hint: If you have entered all the values and formulas
correctly, you should have a total variable cost of $1,739.20 in cell E23. If you don’t have
that value, review your entries of Steps 1 and 2.)

Breakeven Variable Costs. Prior to computing the breakeven variable costs we need to format
cells B24 and D24.

 In cell B24, enter the formula symbol = followed by the cell reference B8 and hit Enter.
Automatically, “Gallon” should appear in B24. (Note: As we develop the enterprise
budget, we try to make each of the cells interactive so we don’t have to manually re-enter
data or information that we have done before. In this case, if we happen to reuse the
formatted enterprise budget for another enterprise, we may only have to change the word
from “gallon” to “ton” as found in Peter’s budget in Table 9.1.)
 In cell D24, enter the formula symbol = followed by the cell reference D8 then press
Enter. The number 285 (the number of gallons produced per batch) should appear.
 Finally, in cell F24, enter the formula that will divide the total variable cost value (cell
E23) by the number of gallons produced (cell D24). What value did you get for the
breakeven variable costs? (Check your answer with the answer given at that bottom of
this page.)[2]
The breakeven variable costs value in F24 can be valuable information for Michael. He knows he
will have to at least sell his pineapple juice for that value to cover all of his variable costs. He
will compare the market price ($9 per gallon) with the breakeven variable cost. If the market
price is greater than the breakeven variable costs, then he will continue to produce. If the market
price is less than the breakeven variable costs, then he will have look at using less inputs or not
produce at all.

Fixed Expenses

1. Beginning in Row 27, enter the information for those inputs that are fixed (listed in Table
9.3 as FC). The following instructions will get you started. For the cells listed below,
make the following changes:
o A27 enter the name of the first fixed cost: Factory Maintenance
o B27 enter the unit type: batch
o C27 enter the cost of the fixed cost: $20.00 (from table 9.3)
o D27 enter the number of units of the fixed input: 1
o E27 enter the formula that multiplies the price per unit times the number of units.
(Hint: Look again at the formula at the bottom of the page.)
2. Repeat Step 1 for each of the fixed inputs in Table 9.3. (Refer to Table 9.1 Peter’s
enterprise budget for producing fresh tomatoes as an example.)
3. Total Fixed Costs. In cell E33 enter a formula that will sum all of the total value per
batch entries of the fixed inputs. Note that the last entry in the fixed expenses section is
titled “Overhead.” This value represents the costs that may come from the office,
administration, or miscellaneous costs not accounted for. It is common to assume that the
overhead costs are generally computed as 5% of the total costs, variable and fixed, to that
point. The formula is already included in the budget format. Move your cursor over to
cell E32 to see how it is computed. (Hint: If you have entered all the values and formulas
correctly, you should have a total fixed cost of $296.96 in cell E33. If you don’t have that
value, review your entries of Steps 1 and 2.)

Breakeven Fixed Costs. Prior to computing the breakeven fixed costs we need to format cell
D31.

 In cell D34, enter the formula symbol = followed by the cell reference D8. The number
285 (the number of gallons produced per batch) should appear.
 Finally, in cell F34, enter the formula that will divide the total fixed cost value (cell E33)
by the number of gallons produced (cell D34). What value did you get for the breakeven
fixed costs?

The breakeven fixed costs value in F34 can be valuable information for Michael. He knows that
he will have to at least sell his pineapple juice for that value to cover all of his fixed costs. He
will compare the market price ($9 per gallon) with the breakeven fixed cost.
Calculating Total Costs, Breakeven Costs and Estimated Profit (Loss)
Rows 36, 37, and 39 of the enterprise budget are the “Summary” section of the budget. Complete
those rows by making the following changes:

1. In cell E36, enter the formula that totals the variable costs (E23) and the fixed costs
(E33).
2. In cell D37, enter the formula symbol = and cell D8. This will repeat the total number of
gallons produced.
3. In cell F37, enter the formula that will compute the breakeven total costs. The value in
cell F37 should be $7.14 per gallon. This value will be compared with the market price
that Michael will receive. If the market price is above the breakeven total costs, then
Michael can conclude that the enterprise is financially feasible.
4. In cell E39, enter the formula that will give the profit or loss of the enterprise. (Hint: The
formula for finding profit or loss is Total Revenue minus Total Costs.)
5. In cell F39, you can also compute the profit or loss per unit (gallon in this case). Enter the
formula that will compute the profit or loss per unit.

Breakeven Table Explained

Michael’s enterprise budget also included a pre-formatted breakeven table of alternative market
prices and alternative production levels. Note that the breakeven table has highlighted sections
(for example, row 49 and column F) that represent the “base line” level of market price and
output level (for example, $9 per gallon and an output level of 285 gallons) for Michael. When
you fill in each of the cells of the enterprise budget, the breakeven table is automatically filled.
Please take time to move your cursor over the different cells so you see the formulas that are
used in building the table.

The initial market price ($9) and output yield (285 gallons) are increased and decreased in 10%
increments to provide a range of prices and yields. As you complete the enterprise budget, you
will see a breakeven line develop based on negative and positive differences between profits and
losses.

Save the enterprise budget file with your name in the file name. You will submit this document
later when you complete the W09 Apply Your Skills.

Financial Feasibility of Fresh Pineapple Juice Processing

As we review the completed enterprise budget for Michael’s operation, we can conclude that the
process is financially feasible. Given the revenue and expenses, Michael can expect to make a
profit from each gallon of fresh pineapple juice that he makes. When you have completed all
activities described above, answer the questions found in the assessment.

When finished with this activity, go to W09 Quiz: Guided Practice and click “Start Quiz!”
[1] To find the total value per batch, you should have entered the formula of market price per
unit times number of units for sale. In cell E8 you should have entered C8*D8.

[2] The value of the breakeven variable costs in cell F24 should be $6.10. The formula in E24
should be =E23/D24.