FBS MODULE 6: Gross Margin Calculation

7/28/2019 FBS MODULE 6: Gross Margin Calculation

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How to do good business?

In this section we will see the possible improvements and how to make good

decisions. We will use our results and do the same calculations for improved tech-niques.

Unit Cost: This is the money spent to produce 1 unit of output. To calculate the

unit cost the total money out (total variable cost) per ha of production is divided by

the total yield realized from that ha of production.

Unit Cost = Variable cost (GHC)

Yield (Kg)

The unit cost helps the farmer to determine how much it costs him/her to produceevery unit of produce and therefore, he/she can already determine how much to sell

his/her produce or if the product price is already known to him/her, it helps to de-

cide if producing and selling the product is profitable.

Labour Productivity: It is a measure how much of the total money-in (also calledthe total income or the gross revenue) resulted from the use of labour BUT not

inputs. That is, if a farmer uses 1 man-day of labour, how much income does this

1man-day provide. Therefore, the more income 1 man-day gives, the more productive

is the use of that labour.

Labour productivity = Gross revenueInput costs (GHC)

Total labour needs (MD)

The labour productivity helps the farmer to know how labour needs affect his/her

profits. The higher the labour needs, the lower the profits, therefore enterprises

that require more labour should provide more income or should have less input cost

in order to remain profitable.

Capital Productivity: it is a measure of how the profit obtained from an enter-prise per production compares with the money spent on that enterprise. It seeks to

answer the question for every 1 GHC that I invested in the enterprise how

much profit/loss did I make in return?

Capital Productivity = Gross margin (profit/loss) (GHC)

Variable cost (GHC)

The capital productivity helps the entrepreneur to decide the profitability of an en-

terprise as compared to the money he/she invests in that enterprise for the season.

Module 6: Decisions for Doing Good

Business

Module 6: Decisions for Doing Good Business


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Gross margin: 1 ha of chili

pepper (Legon 18 variety),

using current practices

Gross Margin: 1 ha of chili

pepper (Legon 18 variety), us-

ing best practices

Activity Unit Quantity

Price

[GHC] Total Quantity

Price

[GHC] Total

Money-out: Inputs

SeedKg 0.5 120.00 60.00 0.5 120.0

0

Herbicide: Round-up Liter 0 8.00 0.00 0 8.00

Fertilizer: NPK 50kg 0 56.00 0.00 0 56.00

Insecticide: Consider Liter 3.75 4.00 15.00 3.75 4.00

Fungicide: Victory 100g 15 2.00 30.00 15 2.00

Input Cost [A] GHC 105.00

Money-out: Labour

Land preparation MD 17.5 5.00 87.50 35 5.00

Nursery operation MD 5 5.00 25.00 5 5.00

Herbicide spraying MD 0 5.00 0.00 2.5 5.00

Transplanting MD 15 5.00 75.00 15 5.00

Weeding MD 30 5.00 150.00 30 5.00

Fertilizer application MD 0 5.00 0.00 12.5 5.00

Insecticide spraying MD 15 5.00 75.00 15 5.00

Fungicide spraying MD 15 5.00 75.00 6 5.00

HarvestingMD 97.5 5.00 450.00 121 5.00

Labour need and

Cost [B] GHC

937.50

Total Money-out [A + B] GHC 1,042.50

Yield kg 3500 6500

PriceGHC/

kg

0.90 0.90

Money-in [C] GHC 3500 0.9 3,150.00 6500 0.90

Gross Margin [C] MINUS [A + B] GHC 2,107.50

Exercise: 5



3/943

Gross margin: 1 ha of maize,


Gross Margin: 1 ha of maize,

using best practices


Price


Price

[GHC] Total

Money-out: Inputs

Seed Kg 22.5 1.0022.50

22.5 1.00

Fertilizer: NPK Bag 0 39.000.00 5 39.00

Urea Bag 0 35.000.00 2.5 35.00

Insecticide Liter 3 12.0036.00 3 12.00

Jute sack Sack 25 2.5062.50 25 2.50


Money-out: Labour

Land preparation MD 18 5.0090.00 18 5.00

Planting MD 13 5.0065.00 13 5.00

Weeding MD 23 5.00115.00 23 5.00

Fertilizer application MD 0 4.000.00 10 4.00

Harvesting MD 8 5.00 40.00 10 5.00

Threshing MD 6 4.0024.00 8 4.00

storing MD 6 4.0024.00 8 4.00

bagging MD 4 4.0016.00 5 4.00

Labour need and

Cost [B] GHC78

374.00

Total Money-out [A + B] GHC495.00

Yield kg 1100 3000

PriceGHC/

kg0.50 0.50

Money-in [C] GHC 1100 0.50 550.00 3000 0.50

Gross Margin [C] MINUS [A + B] GHC 55.00

Exercise: 6



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Gross margin: 1 ha of

mango, (250 trees) using

current practices

Gross Margin: 1 ha of


best practices


Price

[GHC] Total

Quan-

tity

Price

[GHC] Total

Money-out: Inputs

Insecticides Liter 3 16.00 48.00 9.00 15.60

Pheromone traps No. 12 7.50 90.00 12.00 7.50

Fungicide: Kocide Sachet 25 0.50 12.50 0 0.50

Fungicide: Pele Liter 0.00 30.00 0.00 5.60 30.00

Fungicide: Agrithane kg 0.00 5.00 0.00 4.00 5.00

Weedicide Liter 0.00 12.00 0.00 3.00 12.00

Bactericide Kg 0.00 12.00 0.00 9.00 12.00

Foliar fert. + Kelik K kg 0.00 16.50 0.00 9.00 16.50

Fert.: Asasewura 50 kg 0.00 28.00 0.00 7.50 28.00

Manure 25kg 0.00 3.00 0.00 50.00 3.00

Potassium Nitrate Kg 0.00 4.00 0.00 26.00 4.00

Fruit master Kg 0.00 4.50 0.00 4.80 4.50

Water - 9.00 1.00 9.00 9.00 1.00


Money-out: Labour

Fire belt MD 10 5.00 50.00 10 5.00

Pesticide spraying MD 48 5.00 240.00 144 5.00

Fertilizer application MD 0 5.00 0.00 80 5.00

Weeding MD 13 5.00 65.00 10 5.00

Maintenance pruning MD 4 5.00 20.00 20 6.00

Scouting/fruit drop MD 12 5.00 60.00 10 5.00

Harvesting MD 4 5.00 20.00 24 5.00

Labour need and Cost

[B] GHCMD 91

405.00298

Total Money-out [A + B] GHC 564.50

Yield Kg 10000 35000

Price GHC/kg 0.30 0.45

Money-in [C] GHC 10000 0.30 3,000.00 35000 0.45

Gross Margin [C] MINUS [A + B] GHC 2435.50

Exercise: 7



5/945

Gross margin: 1 ha of chili

pepper (Legon 18 variety),


Gross Margin: 1 ha of chili

pepper (Legon 18 variety), us-

ing best practices


Price


Price

[GHC] Total

Money-out: Inputs

SeedKg 0.5 120.00 60.00 0.5 120.0

0

60.00

Herbicide: Round-up Liter 0 8.00 0.00 0 8.00 40.00

Fertilizer: NPK 50kg 0 56.00 0.00 0 56.00 280.00

Insecticide: Consider Liter 3.75 4.00 15.00 3.75 4.00 15.00

Fungicide: Victory 100g 15 2.00 30.00 15 2.00 30.00

Input Cost [A] GHC 105.00 425.00

Money-out: Labour

Land preparation MD 17.5 5.00 87.50 35 5.00 175.00

Nursery operation MD 5 5.00 25.00 5 5.00 25.00

Herbicide spraying MD 0 5.00 0.00 2.5 5.00 12.50

Transplanting MD 15 5.00 75.00 15 5.00 75.00

Weeding MD 30 5.00 150.00 30 5.00 150.00

Fertilizer application MD 0 5.00 0.00 12.5 5.00 62.50

Insecticide spraying MD 15 5.00 75.00 15 5.00 75.00

Fungicide spraying MD 15 5.00 75.00 6 5.00 30.00

HarvestingMD 97.5 5.00 450.00 121 5.00 605.00

Labour need and

Cost [B] GHC

937.50 1210.00

Total Money-out [A + B] GHC 1,042.50 1635.00

Yield kg 3500 6500

PriceGHC/

kg

0.90 0.90

Money-in [C] GHC 3500 0.9 3,150.00 6500 0.90 5,850.00

Gross Margin [C] MINUS [A + B] GHC 2,107.50 4,215.00

Solution: 5



6/946

Gross margin: 1 ha of maize,


Gross Margin: 1 ha of maize,

using best practices


Price


Price

[GHC] Total

Money-out: Inputs

Seed Kg 22.5 1.0022.50

22.5 1.0022.5

Fertilizer: NPK Bag 0 39.000.00 5 39.00 195

Urea Bag 0 35.000.00 2.5 35.00 87.5

Insecticide Liter 3 12.0036.00 3 12.00 36

Jute sack Sack 25 2.5062.50 25 2.50 62.5

Input Cost [A] GHC 121.00 403.5

Money-out: Labour

Land preparation MD 18 5.0090.00 18 5.00 90

Planting MD 13 5.0065.00 13 5.00 65

Weeding MD 23 5.00115.00 23 5.00 115.00

Fertilizer application MD 0 4.000.00 10 4.00 40

Harvesting MD 8 5.00 40.00 10 5.00 50

Threshing MD 6 4.0024.00 8 4.00 32

storing MD 6 4.0024.00 8 4.00 32

bagging MD 4 4.0016.00 5 4.00 20

Labour need and

Cost [B] GHC78

374.00 444

Total Money-out [A + B] GHC495.00 847.5

Yield kg 1100 3000

PriceGHC/

kg0.50 0.50

Money-in [C] GHC 1100 0.50 550.00 3000 0.50 1500

Gross Margin [C] MINUS [A + B] GHC 55.00 652.5

Solution: 6



7/947

Gross margin: 1 ha of


current practices

Gross Margin: 1 ha of


best practices


Price

[GHC] Total

Quan-

tity

Price

[GHC] Total

Money-out: Inputs

Insecticides Liter 3 16.00 48.00 9.00 15.60141.00

Pheromone traps No. 12 7.50 90.00 12.00 7.50 90.00

Fungicide: Kocide Sachet 25 0.50 12.50 0 0.500.00

Fungicide: Pele Liter 0.00 30.00 0.00 5.60 30.00168.00

Fungicide: Agrithane kg 0.00 5.00 0.00 4.00 5.0020.00

Weedicide Liter 0.00 12.00 0.00 3.00 12.0036.00

Bactericide Kg 0.00 12.00 0.00 9.00 12.00108.00

Foliar fert. + Kelik K kg 0.00 16.50 0.00 9.00 16.50148.50

Fert.: Asasewura 50 kg 0.00 28.00 0.00 7.50 28.00 210.00

Manure 25kg 0.00 3.00 0.00 50.00 3.00 150.00

Potassium Nitrate Kg 0.00 4.00 0.00 26.00 4.00104.00

Fruit master Kg 0.00 4.50 0.00 4.80 4.5021.60

Water - 9.00 1.00 9.00 9.00 1.009.00

Input Cost [A] GHC 159.00 1206.10

Money-out: Labour

Fire belt MD 10 5.00 50.00 10 5.00 50.00

Pesticide spraying MD 48 5.00 240.00 144 5.00 720.00

Fertilizer application MD 0 5.00 0.00 80 5.00 400.00

Weeding MD 13 5.00 65.00 10 5.00 50.00

Maintenance pruning MD 4 5.00 20.00 20 6.00 120.00

Scouting/fruit drop MD 12 5.00 60.00 10 5.00 50.00

Harvesting MD 4 5.00 20.00 24 5.00 120.00

Labour need and Cost

[B] GHCMD 91

455.00298

1510.00

Total Money-out [A + B] GHC 614.50 2716.10

Yield Kg 10000 32000

Price GHC/kg 0.30 0.45

Money-in [C] GHC 10000 0.30 3,000.00 32000 0.45 15,7050.00

Gross Margin [C] MINUS [A + B] GHC 2385.50 13,033.90

Solution: 7



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Currentpractices RANK

Improvedpractices RANK

Chili Pepper

Gross margin (Profit or loss) GHCMoney in MINUS Money out 2,107.50 4,215.00

Unit cost (GHS/Kg)

Variable/Yield

0.29 0.25

Labour Productivity (GHS per MD)Gross revenue - Input Cost/Labour needs 15.62 21.10

Capital ProductivityGross margin/Variable Costs 2.02 2.58

Maize

Gross margin (Profit or loss) GHCMoney in MINUS Money out 55.00 652.50

Unit cost (GHS/Kg)Variable/Yield 0.45 0.28



Gross margin (Profit or loss) GHC

Money in MINUS Money out 2,385.50 13,033.90

Unit cost (GHS/Kg)Variable/Yield 0.06 0.08



Mango

After all the calculations, we will determine the opportunities to increase revenues.By looking at the numbers on this page we will learn how to make investment deci-sions. We will determine the best opportunities by using gross margin, unit cost, la-bour productivity and capital productivity.

Rank crops based on each of these factors (gross margin, unit cost, capital and la-

bour productivity). For example which crop has the least unit cost of production?

Finding opportunities to increase revenue and to reduce cost of production



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Main Lessons:

Unit cost (GHS/Kg)

Variable/Yield

Labour Productivity (GHS per MD)

Gross revenue - Input Cost/Labour needs

Capital Productivity

Gross margin/Variable Costs

Improved varieties Chili Maize Mango

1. The unit cost of a crop indicates if it can compete on the international market withthe same crop produced elsewhere. In the case of food crops, the Unit Cost indi-

cates if it is better to buy the crop on the market.

2. If the unit cost of product is greater than the selling price on the market, it is not

profitable to produce such a product , it is better to buy it on the market and

concentrate on producing a product which has a lower unit cost than the selling

price.

3. Comparing profits of different crops and production techniques help to make deci-

sions on using the land to maximize revenue. This comparison is important to all ag-

ricultural entrepreneurs because production decisions are based on them.

4. Improved production techniques, increases the labour productivity of an enterprise

because it increases the total income received from the sale of that product

(remember total income = price x yield). Therefore, improved technology increases

yield and lower the amount of labour needed in the enterprise.

5. The good agricultural entrepreneur knows that an enterprise is only profitable when

the income received (money-in )is greater than the total cost of production (money

out). The greater the money-in, the more productive is the money invested (money-

out) and the more profitable is that enterprise.

Now Compare different enterprises to assess their cost and productivity

1. Which enterprise is more productive in the use of labour?

2. What are the factors that affect labour productivity?

3. Which enterprise is more capital productive?4. Which factors affect capital productivity?

5. What is the importance of capital productivity to an entrepreneur?

6. Would an entrepreneur engaged in a business comprising these 3 enterprisesconsider his/her business as profitable?

Exercise 8: fill in the unit cost, labour and capital productivities using informationfrom the previous page.


Documents

FBS MODULE 6: Gross Margin Calculation