The gross margin can be used as a budgeting tool to compare the profitability of one enterprise with another. If a farmer wishes to substitute the production of 10 hectares of millet for maize, the gross margin of each can be determined on per hectare basis and the crop enterprise with highest gross margin selected.
For example:
N Maize = 1,350 Value of production/hectare = 400 Gross margin/hectare = 950 Millet =
Value of production/hectare = 800 Variable cost/hectare = 250 Gross margin/hectare = 550
Since maize gives a higher gross margin per hectare, the farmer can be advised to turn the ten hectares of land to the production of maize.
The gross margin analysis is useful in comparing the profitability of alternative farm plans. For an example, plan I may contain enterprises like maize, millet, sorghum and cotton, while plan II may contain cotton, rice, yam and cassava. The total gross margin for Plans I and II are given by
GMr = GMmillet + GMsorghum + GMcoton.
GMII = GMyam + GMcassava + GMRice + GMcotton.
If GMII is greater than GMI, Plan II can be followed. However, in choosing between enterprises and different farm plans, profitability is not the only criterion that needs to be followed. The risk associated with, and the personal preferences on, each type of enterprise need to be considered.
Self – Assessment Exercise I
1. A farm has the following farm size, revenues and specific costs relating to cowpeas, groundnuts, maize and millet enterprises.
Crop Enterprises Cowpeas Groundnut Maize
Land size (Hectares)
3.0 2.0 4.0 3.0
Estimated value of Crops (Hectares)
N 2,000 1,000 1,450 850
Variable or Specific Costs (N per hectares)
600 250 470
What is the gross margin per cropped hectare for each crop?
This farmer has a poultry farm of 320 birds with variable costs totaling N300 per month. He estimated his revenue from the birds to be N650 per month.
He also owns a swine enterprise for which the variable cost per month is N200. His estimated annual return is N3,600. Compute the yearly gross margin for his livestock enterprises.
Compute the net farm income for this farmer if the fixed costs are as follows:
Implements Equipment Buildings
Value N 400 600 2,000
Salvage Value N
50 50 200
Year of Life 5 5 10 Permanent labour costs him N2,000 p.a
Self-Assessment Exercise 2
Given the following information should the farmer grow tomatoes or onions?
What other factors must the farmer consider before making a choice?
Seedlings Land Clearing Ridging Planting Weeding Harvesting Sales Land size Marketing Fertilizer
Labour is costed at N3 per 8 man-hour day
Tomatoes N 120 150 300 20 man-hours 450 man-hours 300 man-hours
6,050 3 hectares
199 60
Onions 120 100 200 60 man-hours 240 man-hours 100 man-hours
2,800 2 hectares
20 40
4.0 CONCLUSION
Gross margin analysis is good, simple and easy to understand planning tool for students for farm management and managers alike. The component parts are the gross farm income and total variable cost, the difference of which is the gross margin.
5.0 SUMMARY
You have learnt in this unit that gross margin is the difference between the gross farm income and the total variable cost of production. The gross farm income is the total value of production which derived by the product of the total physical product and the unit price of the product. The total variable cost is the sum of the expenses incurred on the variable costs.
It is possible to determine the gross margin for different enterprises on the farm. If there are more than one enterprise on the farm, the gross margin of the various enterprises are summed up to arrive at the total gross margin of the farm.
Gross margin is a very useful tool for planning, particularly in situations under subsistence farming where fixed costs are almost negligible. Gross margin is easy to compute and easy to calculate net farm income.
As a planning tool, gross margin is the simplest. The total gross margin is calculated for the enterprises in a plan and this is compared with total gross
margin from he other plan. The plan with the greater total gross margin is preferred and chosen for execution all other things being equal.
Answers to Self Assessment Exercises i. Gross Margin per cropped hectare:
Cowpeas N2,000 - 800 = 1,200 Groundnuts 1,200 - 560 = 640 Maize 1,450 – 450 = 1,000 Millet 850 - 260 = 590 Gross margin for the livestock enterprises:
GM poultry: N(640 - 300) x 12 = N4,200 p.a GM Swine: N(3600 - (200 x 12) = N1,200 p.a Fixed Costs:
400 - 50
Depreciation on implements --- = N70 5
600 - 50
Depreciation on Equipments --- = N110 5
2000 - 200
Depreciation on Buildings --- = N360 5
Total Depreciation = N 540 Permanent Labour = N2,000 Total Fixed Cost = N2,540
Net Farm Income = TGM - TFC = 8,830 – 2,540 N6,290
2.
Tomatoes N
Onions N
Seedling 120 120
Land Clearing Ridging
150 300
100 200 Planting 20
--- x 3 - 3.75 11.25 8
450
Weeding --- X 3 = 168.75 90
8 300
Harvesting --- X 3 = 56.25 18.75 8
Marketing cost 199 20
Fertilizer 60 40
---
---1057.75 600.00
1057.75 600 Variable cost per hectare --- = 352.58 --- 300.00
3 2 6050 2800
Sales/ha --- = 2016.67 --- = 1400.00
3 2
Gross Margin/ha 1664.09 1100.00
Decision: The farmer should be advised to grow tomatoes.
Other Factors to be considered include:
i. The labour requirement for tomatoes is much higher than for onions ii. Will the labour be available?
iii. Will the price of tomatoes remain high?