Wholesome Wheat Corporation grows grain in rural areas of the South. The corporation's costs per bushel of grain (based on an average yield of 130 bushels per acre) follow:
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Direct material
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$1.10
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Direct labor
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0.40
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Variable overhead
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0.30
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Fixed overhead
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0.60
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Variable selling costs
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0.10
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Fixed selling costs
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0
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1. Wholesome Wheat Corporation defines direct material costs as seed, fertilizer, water, and other chemicals. The variable overhead costs represent maintenance and repair costs of machinery. The fixed overhead costs are completely comprised of depreciation expense on machinery and real estate taxes.
2. Refer to Wholesome Wheat Corporation. Assume that the current date is March 15. On this date, the corporation must make a decision as to whether it is financially better off to plant a certain farm with grain or leave the land idle (no income is derived from idle land). Grain prices have been severely depressed in recent years and Wholesome Wheat's best guess is that grain prices will be around $2.00 per bushel at the time the crop is ready for harvest. Should the company plant grain or leave the land idle? Explain.
3. Refer to Wholesome Wheat Corporation. Assume for this question only that the company decided to plant the grain. A local oil refiner has approached the company about converting the crop to grain alcohol (used to make gasohol) rather than selling the grain to the local grain elevator. If Wholesome Wheat converts the grain to alcohol, it will incur additional costs of $0.60 per bushel, and the company will be able to sell the crop to the oil refiner for the equivalent of $2.60 per bushel. Otherwise, the company can sell the grain crop to the local grain elevator for $1.85 per bushel. If Wholesome Wheat elects to sell the grain to the refinery, the company will not incur the variable selling costs. What should the company do? Support your answer with calculations.
4. Refer to Wholesome Wheat Corporation. Assume that the current date is March 15. On this date, Wholesome Wheat Corporation must make a decision as to whether it is financially better off to plant a certain farm to grain, leave the land idle (no income is derived from idle land), or rent the land to another farmer for $50 per acre. Grain prices have been severely depressed in recent years and Wholesome Wheat Corporation's best guess is that grain prices will be around $2.00 per bushel at the time the crop is ready for harvest. What should the company do? Show calculations.