Econs currently, farmer, demand, action, should

busprof

John Klement is a soybean farmer who harvests 125,000 bushels of soybeans annually. Klement’s fixed costs are $200,000 and his variable costs are $5 per bushel. Soybeans are currently priced at $5.35 per bushel. Based on his estimates, Klement sees soybean prices being relatively stable for the next two years, then increasing to $7.00 per bushel due to increased demand from Japan. What action should Klement take? Klement should:

A) cut his production by 50% for the next two years and then resume full production.
B) shut down for two years and then restart his business.
C) continue operating his business as usual.

FVPV

D) Tell Japan to harvest their own soybeans

marsilni

Funny!

Correct Answer is C.

Why? Because he's able to atleast pay his variable costs? What about the fixed costs? Dude is losing money!

rkapoor

As long as you can cover your variable costs you stay open. Fixed costs are sunk costs. You don't consider them when making decisions because they are paid either way.

Of course, in the long run, this wouldn't continue.

BTW, Japan is too snobby and protective of their own crops. They would never buy foreign stuff. ;)

Penny-wenny

ya answer is c....he gets 668750, and his variable costs are 625000 so hes covering his variable costs and some of his fixed costs as well....or a better option would be to register for cfa level 1...atleast he can make his own decisions then!

hariRaj

Movado1108 Wrote:
-------------------------------------------------------
> gotta be B : shut down and import from China


then find out that the stuff looks like soybean but is actually something else.

disiz64

raw Wrote:
-------------------------------------------------------
> The answer is C. As long as you are able to cover
> you fixed costs you should stay in business. It
> is when the farmer does not produce enough to
> cover his fixed costs is when he should shut down.


Don't you mean variable costs?

ramdabom

CFAtime Wrote:
-------------------------------------------------------
> raw Wrote:
> --------------------------------------------------
> -----
> > The answer is C. As long as you are able to
> cover
> > you fixed costs you should stay in business.
> It
> > is when the farmer does not produce enough to
> > cover his fixed costs is when he should shut
> down.
>
>
> Don't you mean variable costs?

variable it is.