AN AML’X’SIS» QF CC'ST RELAYEONSHIPS EN GRAIN PLANTS “zest: for flu; Degree 0‘ M. S. MEC'Z‘HGAN STATE UNEVERSIT‘Y Carson D. Keyes 19 61 LIBRARY # L M ichiga“ Sth E UnivchItY PLACE N RETURN BOX to remove this checkout from your record. TO AVOID FINES return on or botoro duo duo. DATE DUE DATE DUE DATE DUE “ML MSU Is An Afl‘imuivo Action/Equal Opportunity Institution smarts-9.1 AN ANALYSIS OF COST RELATIONSHIPS IN GRAIN PLANTS by CARSON D. KEYES AN ABSTRACT Submitted to.the College of Agriculture of Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE Department of Agricultural Economics 1961 I / z / _ / Approved bYCé;C(_LLfiL\;{Yr1;JLLflqQfittkfl’ AN ANALYSIS OF COST RELATIONSHIPS IN GRAIN PLANTS by Carson D. Keyes AN ABSTRACT Michigan elevators operate in a diverse agricultural and industrial economy and must be able to adjust to a continually changing environment, both in product and factor markets. These changing conditions require that management act cautiously when considering investing in new facilities or in remodeling old facilities. This study is designed to provide information re- quired in the planning process, in making decisions pertinent to plant reorganization, and in adjusting firms to meet future physical and economic needs. It is anticipated that the re- sults of this study will provide useful guides to elevator owners and managers, boards of directors, management consult- ants and research or extension personnel in analyzing and oper- ating Michigan grain elevators. This study is limited to an investigation of the grain merchandising operation since this operation is the focal point around which the rest of the firm's activities are adjusted. An "economic-engineering" type of analysis is used to com- pare the cost-volume relationships between different sized model plants. The model plants were developed by using in- formation from elevators that are actually operating in Michp igan and from infbrmation received from elevator designers and builders, machinery manufacturers, and people actively engaged in the Michigan elevator industry. The plants were developed and constructed in light of economic conditions existing in Michigan during 1961. Each model plants' operating cost and annual volume were estimated as affected by the following conditions: plant size or scale of plant, annual hours of operation, receiving mix (percent of small grain and ear corn received by time), and average load size received. Economies of scale were observed between the various sized model plants. Economies of scale were greatest for those plants operating at a low capacity utilization level, 300 hours annual operation. As the number of hours of oper- ation are increased the economies of scale between plants decrease. Thus, the economies of scale that were observed fbr the model plants operating 1200 and 1500 hours per year were negligible. The results of this study indicate that, based on plant size alone, there are two ways of looking at economies of scale in the Operation of grain elevators. Those economies which exist for low levels of plant utilization and those existing for full or higher plant capacity utilization. If management is interested only in economies of operation during the harvest season, a period of low capacity utilization, then it would pay them to construct a large plant to take ad- vantage of the economies of scale that exist at these pro- duction levels. But if management is more concerned with full or annual plant capacity utilization it would not pay to construct as large a plant. However, most elevator oper- ators are interested in both of the above types of economies. Therefore location factors and the economic environment in which the plant operates becomes of utmost importance in determining plant capacity utilization and should be con- sidered before deciding on a scale of plant for a particular area. AN ANALYSIS OF COST RELATIONSHIPS IN GRAIN PLANTS by CARSON D. KEYES A THESIS Submitted to the College of Agriculture of’MiChigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE Department of Agricultural Economics 1961 ACKNOWLEDGEMENTS The author wishes to express his sincere appreciation to all individuals who assisted in the development and completion or thia thGSi‘e The author is particularly indebted to Dr. Vernon L. Sorenson, Associate Professor, Department of Agricultural Econo- mics, under whose supervision this study was conducted. The guidance offered and the interest shown on the part of Dr. Sorenson regarding the author's research was an important part both in the conduct of this study and in the author's total graduate program. The author wishes to express his appreciation to Mr. Alvin L. Rippen, Extension Specialist in Food Science, who has given freely of his time and advice when they were sought by the author. Dr. Larry L. Boger, Head, Department of Agricultural Economics, made this study possible by making available to the author financial assistance in the form of a research assistantship. His aid in this manner is greatly appreciated. The author is grateful to those individuals, firms, and organizations too numerous to list who supplied helpful infor- mation in developing elevator facilities and cost for the model plants used in this study. Full reSponsibility remains with the author for any omissions or errors that are found in the manuscript. ii TABLE OF CONTENTS ACKNOWLEDGWNTSOOOOOOOOOOO000......OOOOOOOOOOOOOOO0.0. LIST OF TABLESOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO LIST OF FIGURESOOOOOOOOOOOO0.0.0.0...OOOOOOOOOOOOOOOOO. Chapter I. II. III. INTRODUCTIONOOOOOOOO0.00.0000...OOOOOOOOOOOOOOO PreVious StudiCSeeeeeeeeeeeeeeeeeeeeeeeeeo. ObJeCtiveB Of StudYOOOOOOOOOOOOOO0.0.0.0... Organization of Remainder of The Thesis.... THE MICHIGAN ELEVATOR INDUSTRY................. THE IntrOdUCtiOneeeeeeeeeeeeeeeeeeeeeeeeeeeeeee Current Status of The Michigan Elevator IndustrYOO0.0.0.0....OOOOQOOOOOOOOOOOOOOO Environmental Factors Affecting The Oper- ation of Grain Elevators................. Michigan's Agricultural Industry....... Michigan Agricultural Trends........... Characteristics of Michigan Grain Elevators Mflti-Purpose PlantSOOOOOOOOOOOOOOOO... Complementary Relations Within Grain ElevatorSOOOOOOOOOOOOOOOOOOOOOOOOOOOO Competitive Relations Between Grain ElevatorSOOOOOOKOOOO....0.0.00.0000... The Grain Merchandising Operation of Grain ElgvatorBOOOOCOO0.00.0000...0000......90. THEORETICAL FRAMEWORK AND ANALYTICAL MODEL. Economic Theory and Its Application to COSt“V01ume Studieseeeeeeeeeeeeeeeeeeeeeo The Nature of Short-Run Cost-Output FunctionSOOOOOOOOOOOOOOOOOOOOOOOOOOOO Planning and Its Relation to Long-Run DeCiSiOHSeeeeeeeeeeeeeeeoeeoeeeeeeeee Economies and Diseconomies of Scale.... The Analytical Framework and Model......... iii Page ii vii xii HOOQNJQOVPNH 19 21 21 22 28 33 Chapter Methodology and Procedures............. MOdel Plants........................... Product Flow........................... The Receiving Process.............. The Cleaning Process............... The Weighing Process............... The Storage Process................ The Load-OUt ProceSS............... The Economic Unit.................. Sources of Data Used in The ConstructiOn Of MOdel letSOOOOOOOOOOOOOO00...... Direct Observations................ Equipment Manufactures............. Engineering Estimates of Building COStOOOOOOOOOOOOOOOOOOOOOOOOOOOOO Plant Records and Audits........... Other Sources Of Dataeeeeeeoeeeeeee Assumptions............................ As to Operating Conditions......... As to Size Requirements for Michigan A8 to Location FaCtorseeeeeeeeeeeeo As to Storage Requirements......... As to Economic Model and Conditions IV. MODEL PLANT SPECIFICATIONS AND OPERATING CONDITIONS Model Plant Receiving Capacities and Facj-lities PrOVidedOOOOOOOOOOOOOOOOOOOOOOO Single and Double-Line Plants........... Storage Fac111tie80000000OOOOOOOQOOOOOOO Railroad SidingOOOOOOOOOOOOOOOOOOOOOOOO. Land and Land Improvements.............. Trucking Equipment...................... Office FaCilitieSOOOOOOOOOOOOOOOOOOOOOOO Model Plant Operating Conditions............ General Operating Conditions............ Plant Scale and Annual Hours of Operation RBCGLVing MixeonOOOeoeeeoeeoeoeoeeeeoeo Average Load Size Received.............. Seasonality and Its Affect on Operating Grain Elevator8000000000.0000.0.0.000...0......O. iv 66 Chapter Page Annual Volume as Affected by The Model Plants Operating Conditions............. 69 V. BUDGETING OF COST AND MODEL PLANT COST FUNCTIONS 77 IntrOduCtionOOOOCOO0.00....OOOOOOOOOOOOOO. 77 Investment in Durable Assets.......... 77 Cost Associated With Owning Durable ASSQtSeoeeeeeooeeeeeeeeeeeeeeeeoeeee 79 Variable Cost Associated With Volume and Plant Operations................ 82 Total Annual Cost and Total Cost Functions 91 Short-Run Average Cost and Average Cost curVGSeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee 98 Long-Run Average Cost Curves and Economies of Scale in Model Plants................ 112 VI. SUNJMRY AND CONCLUSIONSOCOOOOOOOOOOOOOOOOOOOOO 116 APPENDIX A. DURABLE ASSET INVESTMENT ESTIMATES....... 12h Estimated Investment in Land and Land ImprovementSOOOOOOOOOOOOOOOOOOOOOOOO 121+ Estimated Investment in Buildings for MOdel Plants...OOOOOOOOOOOOOOOOOOOOO 125 Estimated Investment in Storage FaCilitieSOOOOOOOOOO00.000.000.00... 126 Estimated Investment in Machinery and EquipmentOOOOOOOOOOOOOOOOOOOOOOOOOO. 129 Estimated Investment in Office Buildings 136 Estimated Investment in Office Fur- niture and Equipment................ 137 Estimated Investment in Railroad Siditlg...‘OOOOOOOOOOOOOOOOOO0.00.... 139 Estimated Investment in Trucking Equipment........................... 1A0 Estimated Investment in Corn Cob Bln‘nerSOOOOOOOOOOO00......0.0.0.0... 1L1 APPENDIX B. FIXED COST ESTIMATES..................... 1&3 Depreciation Expense.................. 1A3 Insurance EXPenseOOOOOOOOOOOOOOOOOOOOO 152 Personal Property Tax Expense......... 152 Repairs and Maintenance Expense....... 15h Interest on Investment................ 156 Page APPENDIX C. VARIABLE RESOURCE REQUIREMENTS AND COST ESTIMATESOOOOOOOOOOOO0.0QOOOCCOOOOOOOO... 160 Labor Requirements and Labor Cost EStimateseeoeeeeeoeeeeeeeeoeeeeoeeeeee 160 Model Plants Clerical Requirements and cost EatimateSe O O O O O O O O O O O O O O O O O O O O O O O 163 Model Plant Management Requirements and cost EstimateBOOOOOOOOOOOOOOOOOOOOOOOO 164 Social Security Tax..................... 165 Workmen's Compensation Insurance........ 166 Inventory Insurance..................... 166 Interest on Seasonal Capital............ 168 General Liability Insurance............. 168 Maintenance as A Variable Expense....... 169 Utilities...0..00....0.00.00.00.0000000. 170 Miscellaneous Expenses.................. 172 BIBLIOGRAPHY0.00.0.0.0...OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO 173 vi LIST OF TABLES Table Page 1. Percentage of Total Gross Margin Derived from Different Sources for 34 Michigan Elevator- Fam supply BUSineSSCSeeeeeeeeeeeeeeeeeeeeeeeeeo 9 2. lMichigan Agricultural Trends, 1940 to 1959........ 12 3. Storage Facilities Provided for Model Grain Elevators, Michigan, 1961....................... 56 A. Railroad Sidin Provided for Model Grain Elevators, MiChigan, 19 leeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee 57 5. Allocation of Operating Time to Receiving Grain and Ear Corn According to Receiving Mix and Total Annual Hours of Operation, Michigan, 1961. 65 6. Actual Hourly Receivin Rates for Model Grain Elevators Receiving rain and Corn in Various Load Sizes, MiChigan, 1961.0eeeeeeeeeeeeeeeeeeeo 67 7. Total Annual Volume for Model Grain Elevators Operating Under Various Conditions and Re— ceiving rain 75 Percent of The Time and Corn 25 Percent of The Time, Michigan, l961.......... 70 8. Total Annual Volume for Model Grain Elevators Operating Under Various Conditions and Re- ceiving Grain 50 Percent of The Time and Corn 50 Percent of The Time, Michigan, l96l.......... 72 9. Total Annual Volume for Model Grain Elevators Operating Under Various Conditions and Re- ceiving Grain 25 Percent of The Time and Corn 75 Percent of The Time, Michigan, l961.......... 7h 10. Total Estimated Investment in Machinery and Equipment and Total Annual Depreciation for a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, l961............... 78 11. Estimated Investment in Durable Assets for Model Grain Elevators, Michigan, 196l................. 80 12. Total Investment and Annual Fixed Expenses for Model Grain Elevators, Michigan, 1961........... 83 vii Table Page 13. Total Annual Variable Cost for Model Grain Elevators Operating Under Various Conditions and Receiving Grain 75 Percent of The Time and Corn 25 Percent of The Time, Michigan, 1961..... 85 1h. Total Annual Variable Cost for Model Grain . Elevators Operating Under Various Conditions and Receiving Grain 50 Percent of The Time and Corn 50 Percent of The Time, Michigan, 1961..... 87 15. Total Annual Variable Cost fer Model Grain Elevators Operating Under Various Conditions and Receiving Grain 25 Percent of The Time and Corn 75 Percent of The Time, Michigan, 1961..... 89 16. Total Annual Cost for Model Grain Elevators Oper- ating Under Various Conditions and Receiving Grain 75 Percent of The Time and Corn 25 Percent Of The Time, MiChigan, lgéleoeeeeeeeeeeeeeeeeeee 92 17. Total Annual Cost for Model Grain Elevators Oper- ating Under Various Conditions and Receiving Grain 50 Percent of The Time and Corn 50 Percent Of The Time, MiChigan, lgéleeeeeeeeeeeeeeeeoeeeo 91+ 18. Total Annual Cost for Model Grain Elevators Oper- ating Under Various Conditions and Receiving Grain 25 Percent of The Time and Corn 75 Percent Of The Time, MiChigan, 19610000000oeooeeeeeoeeoo 96 19. Average Cost Per Bushel for Model Grain Elevators Operating Under Various Conditions and Receiving Grain 75 Percent of The Time and Corn 25 Percent of The Time, Michigan, 196l..................... 102 20. Average Cost Per Bushel for Model Grain Elevators Operating Under Various Conditions and Receiving Grain 50 Percent of The Time and Corn 50 Percent Of The Time, MIChigan, 1961eeeeeeeeeeeeeeeeeeeee 10‘} 21. Average Cost Per Bushel for Model Grain Elevators Operating Under Various Conditions and Receiving Grain 25 Percent of The Time and Corn 75 Percent . of The Time, Michigan, l961..................... 106 22. Regression Coefficients and Associated Statistics for Model Single and Double-Line Grain Elevators, M1Chigan, 1961.00.00.000000000000000000000000000 111 23. Estimated Investment in Land and Land Improvements for.Model Grain Elevators, Michigan, 1961....... 125 viii Table Page 2A. Estimated Investment in Buildings for Model Grain Elevators, Michigan, 1961...................... 126 25. Estimated Investment in Storage Facilities fer Model Grain Elevators, Michigan, l96l.......... 128 26. Equipment List and Estimated Equipment Investment for The Receiving Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, MiChigan, 1961.....0OOOOOOOOOOOOOO000.000.00.00 129 27. Equipment List and Estimated Equipment Investment for The Cleaning Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, MiChiga-n, 1961.00.00.00000000000.00.00.00.00... 131 28. Equipment List and Estimated Equipment Investment for The Weighing Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, M1Ch1gan, 1961.00.00.00000000000000.0.0.0000... 132 29. Equipment List and Estimated Equipment Investment for The Storage Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, MiChigan, 1961..OOOOOOOOOOOOOOOOO...COOSOOOOOOOO 133 30. Equipment List and Estimated Equipment Investment for The Load-Out Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, MiChj-gan’ 1961.00.00.00000000000000.0.0.0000... 131+ 31. Miscellaneous Equipment List and Estimated Equip- ment Investment for a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961.00.00.000000000000.0...OOOOOOOOOOOOOOOO... 135 32. Estimated Investment in Office Buildings and Office Space Provided for Each Model Grain Elevator, MiChigan’ 1961.00.00.00.00.00.000.000....00.... 137 33. Equipment List and Estimated Equipment Investment for Office Equipment for a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961eeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee 138 3A. Estimated Investment in Railroad Siding for Model Grain Elevators, Michigan, 196l................ 140 35. Equipment List and Estimated Annual Depreciation fer The Receiving Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, MiChigan, 19610eeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeo ILL ix Table Page #8. Annual Average Inventory for Model Grain Ele- vators, MiChigan, 1961eeeeeeeee eeeeeeeeeeeeeee 167 1.9. General Liability Insurance Rates for Model Grain Elevators, Michigan, l96l............... 169 xi Figure l. 2. 3. A. 5. LIST OF FIGURES Hypothetical Average Variable Cost Curve for Grain ElevatorSOOOOOOOOOOOOOOOOOOOOOOCOOOOOOOOO Process Flow Chart for Michigan Grain Elevators, 1961......OOOOOOOCOOOOOOOOOOOOOO0.0000000000000 Total Annual Cost For A Model Grain Elevator Operating Under Various Conditions, 750 Bushel Per Hour Capacity,.Michigan, 1961.............. Total Annual Cost For A Model Grain Elevator Operating Under Various Conditions, 4500 Bushel Per Hour CapaC1ty, MiChigan, 1961eeeeeeeeeeeeee Short-Run Average Cost Curves for Model Grain Elevators Receiving an Average Load Size of 150 Bushels, A Receiving Mix of 50 Percent Grain and 50 Percent Corn, and Operating Various Hours Per Year, Michigan, l96l......... A Family of Cost Scale Long-Run Average Cost Curves for Model Grain Elevators Operating Various Hours Per Year, Receiving an Average Load Size of 150 Bushels, and A Receiving Mix of 50 Percent Grain and 50 Percent Corn, Michigan, 1961.00.00.000000000...OOOOOOOOOOOOOOOOOOOOOOOO xii Page 25 37 99 100 108 113 CHAPTER I INTRODUCTION Grain elevators serve as the initial link in the movement of grain from the farm, through the marketing system, and into the hands of consumers. They serve as receiving and assembling points for grain to be shipped from local producing areas to terminals for storage or to processing plants. In addition they serve as major distributors of items required in the production of field crops and livestock products. Though the primary func- tion of grain elevators has changed little in recent years, many changes have taken place in the operation and construction of plants as well as in farming, transportation, and other related businesses. O Michigan elevators operate in a very diverse agricultural and industrial economy and must be able to adjust to a continually changing environment, both in product and factor markets. Changes are continuing to take place in technology, agricultural produc- tion, and the organization of agricultural industries. These changing conditions require that management consider long-run adjustments when considering investing in new facilities or in remodeling old facilities. This study is designed to provide . -information required in the planning process, in making decisions pertinent to plant reorganization, and in adjusting firms to meet future physical and economic needs. -1- -2- Egevigus Studies The research that has been conducted in the area of elevator operating efficiency has all had a common objective. That is, the development of better techniques to be used in the evaluation of elevator firms and to develop some useful tools that manage- ment might use in planning and operating their businesses. This study was set in its proper perspective in accordance ‘with previous studies made of the Michigan elevator industry.l Further guidance was then obtained by looking at three previous types of studies. Those dealing with elevator operations as such,2 Arthur J. Pursel, "The Use of Functional Analysis in Evalu- ating The Operations of Midhigan Elevator-Farm Supply Busi- nesses,” Unpublished Master's Thesis 1 , Michigan State University, East Lansing, Michigan, 57, 72 pages; George G. Greenleaf, "A Study of Cost Relationships in Michigan Country Elevators," Unpublished Master's Thesis 1959, ‘Michigan State University, East Lansing, Michigan, 1959, 68 pages; H. E. Larzelere and R. M. King, "Ratios As Measuring Sticks for Elevator and Farm Supply Organizations," Special Bulletin 380, Michigan State College, Agricultural Experi- 'ment Station, Department of Agricultural Economics, East Lansing, Michigan, August 1952, 29 pages; and Vernon L. Sorenson and David Spaeth, "Elevator Outlook Committee Pro- gress Report," Agricultural Economic34752, Department of Agricultural Economics, Michigan State University, East Lansing, Michigan, December 1958, (mimeographed) A6 pages. 2 Richard Phillips, "Managing for Greater Returns In Countr Elevators and Retail Farm—Supply Businesses,a Farmers GraIn DEaIers Association of Iowa, Des Moines, Iowa, October 1951, 558 pages. -3- those dealing with planning elevator facilities,3 and those deal- ing with methodology and research procedures.h An economic-engineering approach to cost-volume analysis is used in this study. This method is used extensively by agricul- tural economists in studying various types of agricultural mar- keting firms including elevators.5 Some previous studies have attempted to evaluate the elevator as a firm rather than as a group of distinct and different opera- tions.6 Many are concerned with the elevator industry of a 3 Heber D. Bouland and Lloyd L. Smith, "A Small Country Elevator for Merchandising Grain, Designs and Recommendations," Market- ing Research Report No. 387, U. S. Departmnt of Agriculture, Agricultural Marketing Service, TranSportation and Facilities Research Division, Washington, D. C., June 1960, 52 pages, and Perry S. Richey and Thew D. Johnson, "Factors To Be Considered In Locating, Planning and Operating Country Elevators," Mar- keting Research Report No. 22, U. S. Department of Agriculture, reduction and Marketing Administration, Washington, D. 0., June 1952, 94 pages. k B. C. French, L. L. Sammet, and R. G. Bressler, "Economic Effi- ciency In Plant Operations With.Special Reference To The Mar- keting of California Pears," Hilgardia, Vol. 2g, No. 12, Uni- versity of California, Berkeley, Ca 1 ornia, uly 5 , pages 5A3-721; and R. G. Bressler, "Research Determination of Economies of6 Scale," Journal of Farm Economics, Volume 27, 19h5, pages 52 -390 Thomas E. Hall, "New Country Elevators, Influence of Size and Volume on Operating Costs," Farmer Cooperative Service Circu- lar 10, U. S. Department of Agriculture, Farmer Cooperative Service, Washington 25, D.C., June 1955, 29 pages; Thomas E. Hall, Walter K. Davis, and Howard L. Hall, "New Local Elevators - Cost-Volume Relations In The Hard Winter Wheat Belt," Service Re ort 12, Farmer Cooperative Service, U. S. Department 0 Agriculture, Washington D. C., May 1955, 112 pages; and Stanley K. Thurston and R. J. Mutti, "Cost-Volume Relationships fer NeW' Country Elevators in The Corn Belt," Service Report 22, Farmer Cooperative Service, U. S. Department 0 Agricu ture, ashing- ton, D. C., September 1957, 78 pages. 6 Pursel, op. cit., 72 pages and Greenleaf, o . cit., 68 pages. -4- particular state rather than with the evaluation of particular firms or Operations within the firm.7 This greatly limits their effectiveness and usefulness in a state such as Michigan that is characterized by multi-purpose elevators operating in a multi- purpose agricultural and industrial economy. Wide variations exist in type of crops grown, and market areas served, hence a great deal of variation exists between elevators within the state. Forthis reason it is difficult to apply the general conclusions drawn from.most studies to a particular Michigan Elevator. ObJectives of Study The dynamic conditions in agriculture are such that planning will be needed to adjust to changing future conditions. With this in mind and recOgnizing the fact that most elevator and farm sup- ply businesses are small, individual leaders in the Michigan feed and grain trade set up a study committee. This committee posed the following question: "What can be done to help individual elevator managers take a look into the future and do a better Job of adjusting to change or or 'keeping up with the times?'" This thesis is in part an attempt to develop some guides that will help the individual elevator operator answer this question. 7 Philli C. Baumel and John W. Sharp, "A Financial Analysis of Ohio E evator Operations," Research Bulletin 81;, Ohio Agri- cultural Experiment Station, Wooster, Ohio, June 1958, 25 pages; and R. J. Mutti, "Differences in The Financial Organization and Operation of Country Grain Elevators in The Northern Half of Illinois, 1954-55," AERR - 17, Department of Agricultural Eco- nomics, University of Illinois, February 1957, 25 pages. -5- To answer this question in its entirety would require several studies covering the various aspects of the grain trade and the many factors which influence the operation of grain elevators. To analyze the entire elevator operation in light of the many contributing factors would be an almost impossible task. This study is therefore limited to an investigation of the grain mer- chandising phase of grain elevator operations. Grain merchandising is one of the many activities found in Michigan elevators. Grain merchandising in this study refers to the receiving of bulk grain and ear corn, shelling corn, cleaning, assembling or temporary storage, and the shipping of grain. Feed mixing and grinding are omitted from this study because the physical handling of unprocessed grain and grain processed as feed are quite different. The hand- ling of feed is usually thought of as a separate operation. ~Grain drying and permanent storage are also omitted from this study. However, these two activities are closely related to the grain merchandising Operation, which will determine to a great extent the size and amount of investment made in grain drying and storage facilities. The storage considered in this study is assumed to be adequate for the grain merchandising operation and can be used for some permanent storage. The major objectives of this study were to develop some eco- nomic benchmarks to aid in the formulation of operating policies and to develop some tools to be used in planning for the most efficient use of resources in the future. Some guides were also -6- developed which will help in making future economic adjustments, especially in the construction and location of new elevators. Organization of Remainder of the Thesis The Michigan Elevator industry and factors affecting the operation of elevators are discussed in Chapter II. Environmental as well as economic operating conditions are included in the dis- cussion. Chapter III contains a discussion of the analytical framework and model. This chapter includes a discussion of the methodology and procedures used in the analysis. Chapter IV deals with the specifications and operating conditions of the model plants used in this study. The physical plant resource require- ments and the methods of estimating cost are the subject matter of Chapter V. This chapter includes an evaluation and discussion of the economies of scale which exist in the model plants. The last chapter, Chapter VI, contains the summary and conclusions drawn from this study. The study also includes several appendixes which contain the major portion of the statistical data on which this study is based. CHAPTER II THE MICHIGAN ELEVATOR INDUSTRY Introduction Many factors contribute to the successful operation of Michigan elevators. They operate in a diverse agricultural econ- omy within which changes are continually taking place. The ele- vator industry is highly competitive in that it includes many small firms that are relatively homogeneous. Each firm is usu- ally composed of several different "operations", grain merchan— dising being but one of several principal or "sideline" activities. This study was designed and directed to the solution of problems within this diverse and competitive industry by providing informa- tion and methods for planning present as well as future physical and economic adjustments. The following discussion considers the environmental and economic framework within which this study was developed. A. short discussion of the current status of the Michhgan elevator industry is followed by a discussion of the agricultural economy of the state and how it affects the operation of grain elevators. This is followed by a discussion of the multi-purpose nature of grain elevators and the competitive interrelations resulting from such operations. The final section shows the importance of and how the grain merchandising operation fits into the firms overall Operation. -8- Current Status of the Michigan Elevator Industry The Michigan elevator and farm supply industry might be classified as a mixture of the old and the new. Many plants were built 30 or 40 years ago. Most of these older facilities have been remodeled and patched up to meet changing conditions, and as a result are rather complex in design and in arrangement of equip— ment. They tend to be uneconomical to operate and obsolete in many phases of modern grain handling. 0n the other hand, Michigan also has some new and well equipped elevators. Michigan elevators are multi-purpose concerns. Pursel, in his functional analysis work with 34 firms found that total gross margin was derived from several major sources as shown in Table 1.8 About 60 percent of the total gross margin of the 34 firms studied comes from merchandised grain, processed grain and ser- vices pertaining to the grain operation. Grain handling is there- fore a primary source of income for Michigan grain elevators. The major portion of Michigan's elevators are located in the southern half of the lower peninsula, with the heaviest concen- tration in the cash crop thumb counties of Huron, Tuscola, Sanilac and Saginaw. The number of elevators in the various farming areas tend to vary with the amount of cash crop farming in that area. Michigan elevators fall into three general categories: inde- pendent or privately owned, coeperatives and the line or elevator 8 Pursel, op.cit., page 9. -9- Table 1:—-Percentage of Total Gross Margin Derived from Different Sources for 34 Michigan Elevator-Farm Supply Businesses .0 All Grain Operations : Farm Production Supplies a : 60.42% : 39.58% Merchan- : Pro- : Service : Ferti- : Petro- : Seeds : Miscel- dised : cessed : Income : lizer : leum : : laneous Grain : Grain : d : : : : Farm b : c : : : : : Supplies % : % : : % : % : % : % 18.06 : 20.09 : 2a.25 : 6.56 : 10.08 : 5.71 : 17.25 fi ffi' a Merchandised grain, processed grain and service income are grouped together because of the high degree or complementarity existing between them. 0 Unprocessed grain which is sOld directly to terminal grain elevators, processing companies, other country grain elevators and farmers. . c Derived primarily from custom feed grinding, mixing operations and from retailing "complete" feed mixes. d Derived primarily Irom grain handling and processing opera- tions, which include: (1) custom grinding and mixing of live- stock feed, (a) handling, trucking and storing grain, and (j) cleaning and treating grain for seed. chains. They range in size from those with a few thousand bushels' capacity to tnose with several hundred thousand bushels' storage capacity. Environmental Factors Affectipg the Operation of Grain Elevators Michigan's Agricultural Industry Michigan has a very diversified type or agriculture. This is due primarily to the wide variations in climate, soil types, topography and markets that are found within the state. Farming in \_,./ -10- Michigan ranges from the very intensive fruit and vegetable farms to the more extensive farms of the northern cutover areas. Agricultural production in Michigan is confined primarily to the southern half of the lower peninsula. In 1959 the southern— most 41 counties, all those south of and including Oceana, Newago, Mecosta, Isabella, Midland and Bay, accounted for over 90 percent of the total harvested acreage of the major cash field crops. This area included 95% of the total harvested acreage of corn and winter wheat, 81% of the oats acreage, 99% of the dry bean acre- age, 90% of the barley acreage and 100% of the soybean and sugar beet acreage.9 When cash receipts from farm marketings are compared the rela- tive importance of the various types of farming become quite evi- dent. In 1959 56% of the cash receipts from farm marketings came from livestock and livestock products, 14% from fruits and vege- tables, 25% from field crops, and 5% from miscellaneous sources. A breakdown of the field crop category shows that winter wheat accounted for 9% of the total cash receipts from farm marketing, dry beans 4%, corn 5%, soybeans 1%, sugar beets 2%, potatoes 2%, and other field crops 2%. Dairy products accounted for 28% of the total cash receipts in 1959.10 ? "Michigan Agricultural Statistics," Michigan Department of Agri- ~culture, Lansing, Michigan, July 1960, page 3. 10 Ibid., page 45. -11- The above facts point out the importance of field crops to the Michigan agricultural industry and in particular to the Michigan elevator industry. A major portion of the field crOps sold for cash, with the exception of potatoes and sugar beets, are handled by elevators in one form or another. Winter wheat, dry beans and soybeans are marketed almost entirely as cash crOps, with the local elevators serving as the primary outlets. Part of the corn, oats and barley crops are also marketed as cash crops, but the major share of these commodities isretained on the farm to be used as feed. However, custom grinding is one of the many functions performed by elevators and much of the grain retained on the farm as feed will pass through the local elevators in the process of grinding and mixing custom feeds. This may become even more important if elevators continue to expand in the opera- tion of grain banks.11 Michigan Agricultural Trends Some of the changes that have taken place in Michigan's agriculture are listed in table 2. Many of these changes directly or indirectly affected the operation of grain elevators. The num- ber of farms and percent of total land in farms have both declined steadily since 1940. At the same time the average size of farms 11 Grain bank refers to a system of operation whereby the farmer delivers his grain to the elevator at harvest time and receives it back in the form of mixed feed. This system works on the same principle as a bank. The farmer can withdraw any amount of feed at any time he desires and in the mix he desires. The elevator makes adjustments for handhng and for any other ingre— dients that are added to the mixed feed. -12- has steadily increased. Over the same period farm mechanization has greatly increased as evidenced by the increased number of grain combines, corn pickers, motortrucks and tractors on Michigan farms. Commercial fertilizers consumption has also increased 4.5 times during this twenty year period. Table 2.--Michigan Agricultural Trends, 1940 to 1959 a Census of Agriculture Years Item : 1959 1954 1950 1945 #1940 : b I Number of farms:lll,817 138,922 155,589 175,268 187,589 Percent of toufl; 40.5 45.1 47.3 50.4 49.4 land in farms : Average size of: 132.2 118.5 111.0 104.9 96.2 farms (acres) : Number of grain: 45,804 43,313 27,234 12,920 .... combines on : farms : Number of corn : 31,294 23,514 10,681 .... .... pickers on : farms : Number Of 3 75,713 71.075 50.966 41,303 35,095 motortrucks : on farms Number of trac-:194,205 187,481 149,377 110,120 66,524 tors on farms : . c : Commercial fer~:756,739 598,475 506,743 340,066 166,564 tilizer con- : sumption (tons): d . : ,_ a "United States Census of Agriculture - 1954, "Volume 1, Counties Egg State Economic Areas, Part 6, Michigan, U. S. Department of Commerce, Bureau ofrthe Census, Washington, D. C., page 2. b Preliminary - 1959 Census of Agriculture. a Includes garden tractors. "Michigan Agricultural Statistics," Michigan Department of Agri- fiElEEEE: Lansing, Michigan July 1960, page 51. g...- a. - ,.___., Aal—r.‘ ~ u ._h.__. ......__ , l l -4- '— "W w -— I U ‘ v . s v - '—~—— M a —-———_.l- k‘ . l s \‘. I *‘a‘ -13- Just what has this meant to the Michigan elevator industry? First, the increased use of commercial fertilizer is but one indication of increased per acre production. Mechanization, larger farms, improved seeds, and better farming techniques have also added to this increased production. This has increased the volume of material that passes through elevators. In addition to increasing production, mechanization has also speeded up the farming process. This has meant that elevators must be able to receive the larger volume in a much shorter time. In recent years the harvest season for winter wheat in Michigan has been ‘reduced from several weeks to only a few days. This has been brought about not only by the increased number of grain combines on farms but also by the development of larger and more effi- cient'combines. The increased number of larger and faster motortrucks has also affected elevators. As the farmer increased his harvesting capacity he also had to increase his transporting capacity. As a result elevators have had to increase their receiving capacity. This meant larger truck hoist, larger receiving pits, larger and faster elevating legs and higher capacity cleaning and processing equipment. Larger, faster and better trucks have also expanded the area that any particular elevator can now serve. This has increased competition between plants. Other recent developments are also affecting and will con- tinue to affect the grain elevators of Michtgan. Opening Of the Saint Lawrence seaway has given the state anOther means of trans- porthg farm commodities. The seaway has also affected the instate .t -14- transportation of some products. The shorter hauls required to get grain to a shipping point have increased the use of trucks in transporting bulk grain to port facilities. These are but a few examples of how a changing agriculture can affect related businesses. The elevator operator has had to adjust and remodel his business to keep up with the dynamic changes that have taken place. We can expect Michigan's agriculture to change even more in future years. Urbanization will continue to affect Michigan's agriculture, transportation methods will con- tinue to change and advances will also be made in both on farm and off farm technology. These rapidly changing conditions and the long range nature of elevator construction and investment puts added importance on planning as an activity of management. Plan- ning to avoid obsolescence in physical facilities as well as planning to allow for the flexibility needed to meet changing conditions. Characteristics of Michigan Grain Elevators Individual elevators differ widely in their operations. These variations may appear in the volume of business, market area served, organizational structure, technology employed, mar- keting and retail services offered, and quality of personnel and management. Though technical differences exist among the individual plants, in terms of size and kind of equipment, the overall tech- nology of the plants is quite similar. -15- Multi-Purpose Plants Most of the elevators in Michigan are made up of several enterprises or activities. The relative importance of any one enterprise to the entire firm may vary widely between firms.la The number of enterprises making up a firm may also vary depend- ing on the environmental and economic conditions surrounding the plant. The problem then becomes one of getting these different enterprises integrated in the right combination to maximize returns. Many factors will contribute to the proper adjustment of a firm - such as, location, type of farming area, competing firms, degree of specialization, and available capital. The adjustments will result in differences between plants based on three important relationships: (1) that firms of equal size, measured by total gross income, may be composed of different enterprises of various sizes; (2) that the relative importance of the different enterprises composing a firm may vary widely between firms; and (3) that firms vary in size because of the size and number of enterprises composing the firm. The factors and reasons causing these relationships are many. Historical as well as current economic conditions have influenced the develOpment and location of many of the elevators in Michigan. Location and the economic conditions in a particu- lar area are probably the most important reasons for the many differences found between plants. 12 Firm as used in this study refers to an elevators entire 0 er- ation of which, the grain merchandising Operation is a par . \/ -16- Complementary Relations Within Grain Elevators The difference between firms and between enterprises within a firm is easily pointed out. However, the relationships and importance of the relationships between activities within a firm are very hard to isolate, much less evaluate. Pursel points out that there is a great deal of technical and market complementarity between the grain merchandising, grain processing and the service operations of.a firm. "Technical complementarity exists because some of the facilities used for other Operations may be used for grain processing and merchandising. Market complementarity exists because grain merchandising and processing volume may be increased as a result of providing the service."15 Such complementarity will exiSt in varying degrees for a particular firm depending on its size and location. For example, an elevator located in the cash crop area of Michigan may have a relatively small feed oper- ation simply because it is located in an area where livestock is of only minor importance. The feed Operation, in order to fully ‘exploit the technical complementarity of inputs, could be much larger in regards to the grain merchandising operation. Techni- cal complementarity between these two activities permits higher utilization Of machinery and equipment, and consequently absorbs idle capacity caused by the highly seasonal nature of the grain merchandising activity. 15 Pursel, gaggit., pages 6-7 -17- Beyond the point of proper proportions for ideal complemen- tarity facilities that provide Operational flexibility also reduce risk caused by shifts in the composition of the grain volume handled by the firm. A competitive relationship could also develop between these two activities. This situation is not likely to develOp because of the seasonal nature of agricultural prOduction and the seasonal demands placed on the various operations and facilities within the plant. A competitive relationship develOps when the various activ- ities become large enough so that they are competing with each other for the use of certain facilities. Bottlenecks are created and the only way to overcome these competitive relationships is to separate the various grain and feed facilities. However, to do this Often requires increased investment in fixed facilities, more specialized emplOyees, and consequently the necessity of increased overall volume. To carry this problem of complementarity one step further, one might even consider all sideline activities as complementary to the grain handling Operation. Economic opportunities for adding sidelines arise from various kinds of unused capacity. Elevator facilities are setting idle much or the time because Of the seasonal nature or grain marketing. This creates idle capac- ity in regards to labor, plant raCilities and managerial ability. Sideline operations absorb some or this idle capacity and prOVide an Opportunity to gain additional grain VOIume from the same farmers who purchase sideline items. In this respect, sideline items and grain are complementary to each Other 60th in the NflrKEE 8110. 111 resource use. -18- These complementary relations create the complex relation- ships that develOp between enterprises. Because of these comple- mentary relations the success or failure of one enterprise may depend largely on another enterprise. However, the affect of one activity on the success or failure of another is very hard to isolate and evaluate. Competitive Relations Between Grain Elevators There are two cases that are of interest to the elevator manager. The first of these is the competitive relationships between similar activities of different firms. These competitive relations directly affect only the operation of those activities involved, but because of the complementary relations between activities within an elevator the entire plant is indirectly affected. For example, the grain merchandising operation of all plants within an area compete for the grain business within that area. Directly this is the only activity affected. However, indirectly the entire plant may be affected because of the comple- mentary relations between activities within the plant. The en- tire firm is affected because other business may be attracted as management strives to increase the annual volume of grain received. On the other hand, one of the other activities within the firm may attract grain business because of some special service rendered in cnnjunction with that activity. The important point is that as management strives to increase the business volume of one enterprise other business may be attracted to the plant. -19- There are also competitive relations existing between entire firms. These competitive relationships are caused by circumstances and management decisions which affect the entire firm and include such things as physical plant size and facilities provided, man— agement, location, degree of specialization and any other factors that affect the entire firms operation. These two competitive relationships overlap considerably and no clear cut distinction can be made between the two. However, their existance does serve to point.out the complex nature of the Michigan elevator industry and the diversity of competitive inter- relationships. These interrelationships make the elevator firm and industry difficult to study and evaluate. The Grain Merchandising Operation of Grain Elevators Because of the multiplicity of interrelationships within the firm it would be difficult to undertake a study of the cost scale relations for complete firms. For this reason it was neces- sary that we limit the sc0pe of this study to an area that is homogeneous enough to handle, but which still has meaning when considered by itself in respect to the entire firm. This study was therefore limited to a cost evaluation or the grain merchan- dising operation. The procedure followed is to develop seven similar mOdel plants, which differ only in physical size and not in design, layout or processing facilities provided. The grain merchandising plant throughout this study denotes a facility specifically designed, constructed, and used as an -20- assembling point for whole grain from farms, and equipped to handle and move grain to points farther along in the marketing channel. The grain merchandising operation was selected over all other activities because the grain merchandising operation is the focal point around which the rest of the firms operations are developed or adjusted. Many of the complementary relation- ships found within elevators are a direct result or the facilities required by this operation. The seasonal nature of grain harvest creates excess plant capacity and to overcome this excess capacity other activities and sidelines are added. CHAPTER III THE THEORETICAL FRAMEWORK AND ANALYTICAL MODEL Economic Theory and Its Application To Cost-Volume Studies Cost as used in static economic theory usually refers to the cost associated with the production of certain commodities.14 Knowledge of cost-volume relations are important for various kinds of managerial problems and decisions - such as; expense control, profit prediction, pricing, and product promotion. Cost functions and more important cost-volume relations are studied for the purpose of explaning their firm or for determining useful guides to be used in making future forecasts and predictions. Explanation and prediction are the goals of economics as well as of most other sciences. Both theoretical analysis and empirical investigations are necessary for the achievement of these goals. The two approaches are complementary, since theories provide guides for empirical studies and empirical studies provide tests of the assumptions and conclusions of theories. In empiri- cal studies many of the simplifications of theory are changed, different classifications adopted, and some of the assumptions dropped. Pure theories therefore provide insight into economic f 14 Cost of production is often divided into several different categories. The same costs often have different meanings in different settings. The cost concept used in a particular situation depends upon the business decision to be made. For a discussion of the various cost concepts see Joel Dean, H22" gggrial Economies, Prentice-Hall, Inc., New York, 1951, pages 25 "TZO -21.. -2g- processes and serve as a background and starting point for applied theories and specific empirical studies.15 Economic theory provides an indication of the shape of cost curves as related to output. The accepted economic doctrine has been that marginal cost rises continuously as output rate in- creases above some given level, and that the resulting average cost curve has a U-shaped relation to output.16 Using this theo- retical foundation as a guide or model we can build graphic and statistical evidence to use as means of comparing theory with actual results. It should be pointed out that economic theory, although an important foundation of cost-volume studies, is not the only dis- cipline to be drawn from. Cost research to be done thoroughly must draw upon economic and statistical analysis, as well as accounting, engineering and other disciplines. Forecasts and predictions based upon cost functions developed from cost-volume studies are subject to error. This does not destroy their use- fulness, but to reduce the sizeand possibility of error as many contributing factors as is feasible should be investigated. The Nature of Short-Run Cost-Output Functions In the short-run there exists a functional relation between cost and a number of independent variables. These independent 15 James M. Henderson and Richard E. Quandt, "Microeconomic Theory A Mathematical Approach", McGraw—Hill Book Company, Inc.,SNew York, I958, pages 1-2. 16 Dean, op.cit., page 272. -23- variables include volume of production, capacity utilization, prices of input services, size of production lot, variety of out- put (product mix), and others. Some of the input factors, e.g., land, buildings, heavy machinery and management, are assumed to be physically fixed and not capable of immediate adaptation to changes in rate of output within the short run limits of flexi- bility. Input factors such as labor, power, raw materials, and the like can be varied in the short-run. These are the firm's "variable resources".17 The "fixed resources" determine the scale or size of the firm. The Scale of plant sets the upper limit to the amount of output per unit of time which the firm is capable of producing in the short-run. Output can be varied up to that limit by increasing or decreasing the quantities of variable resources used in the fixed scale of plant.18 Empirical cost-volume studies are often not directly com- parable with the economic cost mOdel of static economic theory. Static economic theory assumes that all factor and product prices remain constant, that the state of the arts is constant, produc— tion and consumption functions are constant, institutions and institutional factors remain constant, perfect knowledge is assumed, that persons and groups making up the economy are rational, and 17 18 Dean, op.cit., page 273. Richard H. Leftwich, "The Price System and Resource Allocation," Revised Edition, Holt, Rinehart and Winston, New'York,‘I960, page 140. [,- -24- that consumer units and producer units are motivated to maximize the satisfactions derivable from their real incomes and to maxi- mize money profits respectively. These assumptions do not neces- sarily hold true in the real world. This study, using economic engineering data for the basic cost dimensions, does not lend itself to complete specification in terms of this static economic model. Certain factor prices are allowed to vary with volume. Power and certain insurance rates are two examples. Power rates decrease as the amount of power used increases and certain charges for liability insurances decrease as the amount of business or volume increases. However, despite these adjustments the cost-volume relationships developed in this study are close approximations of the static economic model.19 When dealing conceptually with cost as a function of output a distinction is often made between short run and long run cost functions. The short run cost function refers to the relation- ship between cost and rate of output with a given physical plant and assumes that all other independent variables are kept constant. One of the items that is held constant in deriving theoretical cost curves is time. However, in looking at empirical cost rela- tionships in agricultural market firms the relationship between time and unit cost becomes important. It is in fact necessary to 19 A detailed discussion of the application of this model in economic engineering studies can be found in French, et.al, OEecit e , pages 557-64 e -g5- separate cost relationships into those which deal only with rate of output for any unit of time and those which incorporate time into the analysis. From the viewpoint of rate firms will maxi- mize unit profits or minimize unit losses in the short run by operating at a rate of output where average variable cost is at a minimum, point 0A in Figure 1. This point represents an optimal Figure l:-— Hypothetical Average Variable Cost Curve for Grain Elevators Unit Cost b--—-- e o -------- w -------- 0 A Quantity as influenced by Rate of Output IN -gb- technical relationship in resource use with a given set of hmput prices. If these optimum technical conditions are maintained costs will increase in some linear relationship to the number of hours operated. Operating at a rate greater than that specified by GA will be undertaken only if all available time is used up and addi- tional profits can be earned by increasing the rate of output to some larger amount say OB. Theoretically the point beyond 0A at which operations are undertaken will depend on the equating of marginal cost and marginal revenue hence the extent to which rate will be increased with the given cost relationship is determined by the price of the product or the margin obtained. This is in fact the situation faced by many agricultural processing plants. Many plants, especially those which handle perishable commodities operate for a fixed period of time during the year. The period of time in which they Operate is usually fairly constant and they strive to operate at the lowest possible cost throughout this period. If for some reason they are unable to handle all the produce in this limited time they are then faced with the pr0b1em of increasing the per hour rate of opera- tion. Most merchandising firms and some processing plants that must Operate throughout the year cannot and do not operate at a continuous hourly rate. Grain elevators are a case in point. These plants remain open the year around and the volume handled per unit of time fluctuates depending on the circumstances under which the plant is operated. They Operate at an accelerated rate -27- during one season or certain days of the week, at other times they may operate at a normal rate where technical input relationships are optimal and other times at a very low rate where the plant and labor as well as possibly some other inputs normally consid- ered variables are underemployed. These fluctuating hourly oper- ating rates have a profaund and definite effect on the per unit cost of operation. Point A represents the rate at which the plant Operates at a normal technically Optimum basis with the existing or normal labor force that must be maintained. Normal labor force here refers to the number of men usually employed the year around. During these periods even if the plant operates con- tinuously the physical facility is not fully utilized but the normal labor force is fully utilized. The elevator is not con- cerned with operating at full capacity during these periods because material is not arriving at a rate that warrants an increase in the hourly receiving rate and hence hourly unit costs. Thus, there is no pressure on plant facilities during these peri- ods. However, as grain harvest approaches the elevator is con- cerned with increasing the hourly receiving rate so that they can operate at or near the capacity of the plant. This accelerated rate is achieved by adding labor and other variable resources such as power. Since this is not the technical Optimum relation- ship within the plant per unit cost is increased to that which exists at point B. Still one other concern exists in elevators and other farm supply businesses that have continually fluctuating volumes of -28- traffic. Point C represents a point where the plant is operating at a very low hourly rate. Per unit costs are increased here because the normal labor force cannot be reduced and the plant has a great deal of unused capacity as well as unused labor. In any given hour, the plant may operate to the left of point A with the extreme being point D where zero volume is being handled and unit variable costs become infinite. The problem of empirically specifying the short run cost that exists in any given firm then is the index number problem of attempting to determine the number or hours that are operated at any given rate between say maximum plant capacity at point B and a lesser rate from there to zero. Because the labor force in an elevator cannot be reduced below that which exists at point A the problem is handled in this study by computing variable unit cost at the normal or optimal techni- cal point A and at the harvest season capacity point B. This then is related to the time Operated at each rate to compute a total variable cost for the season. The average rate-cost point that emerges will be some point on a straight line between point A and point B, between 15 and l in Figure l. The precise point along this line will depend on the number of hours operated at each rate. Planning and Its Relation to Long-Run Decisions The long-run refers to a situation where it is possible for management to vary the quantities of all resources used. The scale of plant is no longer a limit to what the firm can produce. -29- The long-run cost-volume relationship is often thought of as a series of alternative short-run situations into any one of which the firm can move. The firm can build any one of the possible scales of plant, or it can shift from one to another. The analytical procedure followed in this Study is to develop several model plants and to analyze the cost-volume relationships of these plants. Each individual plants cost-volume relationship is analyzed as being short-run in nature. However, since these results are to be used and viewed as guides to planning, the sev- eral short-run relationships can be viewed together as a long-run analysis. This is possible because the long-run average cost or planning curve is a curve that is tangent to all possible short- run average cost curves representing the different scales of plant which the firm conceivably could build. The long—run aver- age cost curve is therefore made up of very small segments of the various short-run average cost curves and is called an "envelope curve" to the short-run average cost curves. The long-run average cost curve can therefore be defined as a curve which shows the least possible cost per unit of producing various outputs when the firm has time to build any desired scale of plant.20 This procedure has merit in that the various model plants are analyzed individually and at the same time it is possible to see the cost scale relationships between plants of various sizes. 20 Leftwich, op.cit., pages 152’55° -30- Economies and Diseconomies of Scale "If the long-run average cost curve decreases as output in- creases, this must mean that successively larger scales of plant are more efficient than the smaller ones; i.e., their short—run average cost curves lie at successively lower levels as well as farther to the right."21 This phenomenon is called "economies of scale". If "long-run" average costs increase this means that success- ively larger firms or plants become less and less efficient; i.e., their short-run average cost curves lie at successively higher levels and farther to the right. The limitations of certain fac- tors of production beyond a certain point which cause the long- run average cost curve to rise are called "diseconomies of scale." Economies of scale may be caused by many factors. Two important economies of scale are (1) increasing possibilities of division and specialization of labor, and (2) increasing possi- bilities of using advanced technological develOpments and/or larger machines. The division and specialization of labor are almOst impos- sible in plants that employ only a few men. The elevator is a case in point. Most elevators hire only a few men and due to the diverse nature of most elevator operations it is impossible for any one man to specialize at any one particular job. The seasonal 21 Ibid., page 156. -31- nature of agricultural production does, however, allow for short periods of specialization within the plants, i.e., during the har- vest season one man may do nothing but receive and clean grain. Many elevators also have one man whose primary task is to grind and mix custom feeds. However, it is usually found that elevator employees are required to be able to do many different jobs. This leads to inefficiencies in several ways. Time is wasted in moving from one task to another; it is impossible to take advantage Of special talents; and the worker usually does not have the time or desire to develop short cuts and speed in performing the many different tasks. The efficiency of the worker is likely to be higher and cost per unit of output correspondingly lower where division and special- ization of labor are possible. Since the nature of elevators greatly limits the amount of specialization possible the primary concern in this study is with the second type of economies of scale - increasing possibilities of using advanced technological devel- Opments and/or larger machines. As the scale of plant increases the possibilities of lowering costs per unit of output by technological methods also increases. The model plants developed in this study, both large and small, are up to date technologically. Therefore, the technological .efficiencies that are the major concern of this study are the efficiencies resulting from the use of larger processing machines and equipment. Technological efficiencies of this sort result from the fact that in order to double the capacity of a machine to -32- produce, a doubling of material, construction, and Operating costs of the machine may not be necessary. The U-shaped long-run average cost curve of static economic theory not only shows economies of scale but diseconomies of scale as well. Diseconomies of scale are represented by that section of the long-run average cost curve that turns upward to the right as production is increased. The reason usually given for disecon- omies of scale beyond a certain level of production, is that there; are limitations in the efficiency of management in controlling and coordinating a single firm. As a firm gets larger and larger the problems of decision-making and coordination increase. The paper work, travel expenses, telephone bills, and additional employees necessary for coordination increase greatly beyond a certain size of firm. Managements coordination and decision-making abilities are very hard to measure, let alone evaluate. For this reason empiri- cal studies usually do not show the diseconomies portion of the long-run average cost curve, if in fact they exist. The empirical long-run average cost curve usually falls rapidly at first and then levels off and remains fairly constant over a wide range of production possibilities. One reason for this phenomenon, in empirical studies, is that the scale of plant may not become suf- ficiently large for the diseconomies of scale to become apparent. ~33- The Analytical Framework and Model Methodologyiand Procedures The "economic-engineering" method of estimating cost func- tions is used in this study.228 This approach is also often referred to as the "synthetic" approach.z3 Using this method the researcher estimates the costs of Operating plants that do not actually exist and then compares these "synthetic" plants for efficiencies. This method employs a combination of the tools of economics, statistics, accounting, engineering, and other technical subjects pertaining to the industry under investigation. The economic engineering approach was selected for this study because it lends itself to an evaluation of mOdern plants using the latest technological developments. This is in keeping with the major purpose of this study. Model Plants The model plants developed in this study are designed and con- structed for the purpose of receiving and shipping bulk grain only; the grain is received directly from farmers, in the farmer's 22 L.L. Sammet and B. C. French, "Economic—Engineering Methods In Marketing Research," Journal of Farm Economics, Vol 35, 1953, pages 924—30; and French, et.al., op.cit., pages 543-721. 23 Guy Black, "Synthetic Method Of Cost Analysis In Agricultural Marketing Firms," Journal of Farm Economics, Vol 37, No. 2, August 1955, pages 270-79. _._. V,_._- w -54- vehicle, inspected for weeds and dumped into elevator receiving dump pits. From the dump pit it moves through cleaners, is weighed and tested for weight and moisture, and elevated into storage bins or loaded directly into railroad boxcars or trucks for shipment. Ear corn is shelled before cleaning and the c063 and husks cleaned from the grain and blown to a corn cob burner. All grain movement is by mechanical means with little manual labor except in the operation and maintenance of equipment. Gravi- ty flow is used wherever possible. The mOdel plants used in this study were constructed to con- form as nearly as possible to the standard type of elevator found in Michigan. The model plants differ only in physical size and not in operational techniques or technology employed. The model plants are based on the design and equipment specifications or most of the recently built elevators in Michigan. They were designed and develOped from information received from elevator designers and builders within the state. The model plants developed range in size from 750 to 4500 bushels per hour and cover all the various sizes of grain eleva- tors now found in Michigan. This study includes both single and double-line plants as both are found within the Michigan elevator industry. Single-line plants are used for the smaller plants and double-line plants for the larger plants. The 2250 bushel per hour plant, which is very common in Michigan, is used as the breaking point. Both a single and double-line plant is used for this particular size. -jb- Michigan elevators buy several commOdities from farmers. These commOdities include corn, winter wheat, soybeans, dry beans, oats, barley and some quantities or rye, buckwheat and Other grass seeds prOduced in the local areas. The plants devel- oped in this study are designed and equipped to handle all crops prOduced in Michigan. However, the major portion or the analysis is based on the receiving and shipping or winter wheat and field corn, either ear or shelled. The nature of grain and corn harvest requires that elevators be equipped to receive and ship or store large quantities of grain in rather short periods of time. However, storage is usually used only for assembling car load lots. Most commodities are shipped out immediately to make room for the next crop. Corn, a feed crOp, and navy beans may be stored longer because they are harvested at the end of the season and require more processing before they are shipped or sold. Wide variations are found in the amount and type of storage provided by various elevators. The scope or this thesis does not permit a complete evaluation or the various types of available storage facilities. For this reason all mOdel plants are equipped with concrete stave silos, which are extensively used in Michigan and which fulfill the necessary requirements or elevators receiv- ing and shipping grain. Product Flow The Operations found within a grain elevator differ from other agricultural processing plants in that the raw material is F—w W~ -36- not altered except for the removal of foreign material, shelling ear corn being one exception. The major function is the assem- bling and standardization of material for bulk shipment to pro- cessing plants or to terminals for storage. The receiving and cleaning of grain for shipping requires an integrated temporal sequence of elementary processes in each of which the basic raw material changes in location. The process flow chart in Figure 2 shows the various phases and operations involved in the flow of material through the model plants. For the purposes of this analysis, the sequence begins with the arrival at the plant of a farmer's vehicle loaded with ear corn, ‘wheat or some other small grain and ends when the same are loaded into trucks or railroad cars for distribution to other elevators, terminals or processing plants. This long sequence of processes is split into five subsequences or operating phases, each fol- lowed by a temporary delay or storage operation and each connected by some means of transportation. The five operating phases are receiving, cleaning, weighing, storage, and load-out. Each of these consists of all productive services - durable or nondurable - that cooperate in performing a single activity or a group of minor but closely related activities. 'Within each of these phases, equipment was selected and Operated so that the product output rate of the preceding elementary process was approximately or exactly the same as the product input rate of the following elementary process. Temporary delays are provided wherever necessary in the form of hoppers or garner bins. These temporary delays help to even out Figure 2.--Process Flow Chart for Michigan Grain Elevators, 1961. ‘ {/SEreen: .I%:al ing s an yfléggég? Dust Bin} \\ / WEIGHING PHASE STORAGE PHASE y " PROCESS S MBO Stora g 0 Operation ‘— _' " -_ [:J Inspection or Test E) Delay or Temporary Storage :;7 Storage LOAD-OUT [:> Vertical In—Plant Transportation PHASE ' E§§i Horizontal InAPlant Transportation ——) Gravity Flow , -37- —38- and maintain the flow of material through the plant and are espe- cially useful in maintaining the flow of material through parti— cular pieces of equipment. These delays are of importance because many operations are being performed at the same time and it is not always possible to get a perfect synchronization of material flow through the various Operations. They also separate the various operations found within the plant. By-passes are also provided where necessary to allow the material to by-pass those operations which are not required. This condition is brought about by the fact that the same facilities are used for ear corn and other small grains, both of which do not require the same processing. The ReceivinggProcess — The receiving process starts when the farmer arrives at the elevator and drives his vehicle over the dump pit and onto the truck hoist. Once the material has been dumped into the receiving pit it may either be held there for several minutes or it may be moved directly to the next process. The receiving pit acts as the temporary storage point at the end of the receiving process. Material is usually stored for only short periods of time in the receiving pit. During the harvest season, one man usually operates the truck hoist and helps the farmer position and dump his vehicle. At times other than the harvest season one man may be running the entire plant and will help receive as well as Operate all other , operations. The Cleaning Process - The cleaning process includes several Operations which follow in direct order. Gravity flow is used, [l_ -39.. after the initial elevation. The foreign material, corn cobs and screenings are removed along the way and disposed of. The labor required by the cleaning process consists mainly of machinery adjustments on the cleaning and processing equipment; starting, stopping and controlling the flow of material through the various operations; and the removal or bagging of screenings. During the harvest season one man usually performs these opera- tions in conjunction with the weighing and storage processes. The receiving operator usually does the bagging of screenings and assists the cleaning operator in any way possible. At times other than during the harvest season one man may perform the cleaning operations as well as all other Operatinns. This phase requires an operator who is familiar with the cleaning equipment and who is capable of making the necessary equipment adjustments. He must have a thorough knowledge of the various spouts, by-passes, and various routes the material can take as it passes through the cleaning process. The operator must also possess a knowledge of grain and corn grades and the necessary foreign material tolerance associated with each grade. The Weighinngrocess - The weighing process is composed of one operation and is a very important part of the total Operation. It is at this point that the clean grain is sampled and tested for moisture and test weight. The farmer's receipt ticket is also made out at this point. The cleaning operator usually operates this phase in conjunc- tion with the cleaning and storage phases. His primary task is the sampling, testing for moisture and test weight, weighing the (1 -40- partial drafts, and writing the farmer's receipt ticket. This operator must be familiar with the sampling and testing techniques used in testing grain for moisture and test weight. 'In addition he should also possess a knowledge of grain and corn grades so that he can separate the different grades as they are received. He must be familiar with the farmers he serves as he is the one who weighs their grain and who comes in direct contact.with them. He must be able to explain the various test he has made and why he has graded the commodity as he has.’ He must also be able to explain the firm's pricing and dockage policy. The Storage Process - The storage process starts as the material flows from the scales hopper into the main elevating boot. The material is elevated, distributed to one of the stor- age bins, or loaded directly into a truck or railroad boxcar. If the material is distributed directly to a truck or boxcar then the sequence of operations stops at this point. However, if the ma- terial is distributed to one of the storage bins then the sequence of operations must continue with the storage bins serving only as the terminal point of the storage process. The labor required by this Operation consists primarily of adjusting and operating the elevating equipment and seeing that the material is distributed to the right bin or outlet. This phase is usually Operated in conjunction with the weighing phase and requires very little labor other than that used by the weigh- ing phase. -41- The Load-Out Process - The load out process starts with the gravity flow of the material from the storage bins and ends when it is placed in the boxcar or truck Ior shipment. The demand for labor by this phase is primarily in the lOrm or preparing bOxcars Ior loading. The boxcars have to be boarded up and cleaned out lOr the shipment OI grain. Some means is also needed iOr mOVing loaded cars and for spOting empty cars at the loading spout. Less labor is required when loading trucks than when loading boxcars. The actual loading is done by mechanical means and requires very little labor. The main labor requirements are in the IOrm OI starting, contrOlling and stOpping the fIOw OI material through this operation. The flow of material through the plant ends with the loading of grain into boxcars or trucks. The Economic Unit - An economic unit is distinguished from a technical Operation in that it is composed of several technical operations. For purposes of cost comparison the joint operations must be redefined into a single operatinn which is called an economic unit. The minimum cost technolOgies can be determined only by joint consideration or all Operations that are technically related.24 A plant or firm may be composed of several economic units, depending on the rate at which the various phases are capable of operating. This is not the case with grain receiving and shipping elevators. The only difference in the model plants used in this ‘4 French, et.al. lp.cit. page 574. "*a‘ -43- study was in the size of equipment used and not a functional difference. They were not limited in their output because Of bottlenecks found in certain technical operations. The model plants were budgeted as a unit and each plant is under one man- ager or management and is confined to one group of buildings. They are therefore composed of one economic unit which takes in the entire plants Operation. The cost-volume comparisons between the various sized plants are evaluated in this manner. The economic unit is composed of the several technically related Operations which involved the physical handling of the material and all of the management functions which consist Of all the non-physical Operations. These non-physical management functions include the keeping of records, the buying and selling of grain, making payments to farmers for grain receipts, keeping personnel and payroll records, and keeping all other records of management and control. These non-physical functions can be thought of as including all those task involved in the operation of the grain merchandising enterprise other than the physical handling of material within and through the plants. Sources of Data Used In The Construction of Model Plants All cost of plant construction and all Operating cost must be estimated. Therefore, many sources or data may be required to Obtain the necessary estimates. The cost data gathered must be as accurate as possible as well as applicable to the conditions as they exist in the state at the time of their estimation. The lw7.__..__.. _.._ __.__~____ l__ -43- data gathered for this study were obtained from several sources and represent as near as possible the conditions existing in Michigan during l9b1. Operating data as well as cost data were collected for use in constructing the model plants. Sources of data used throughout this study are discussed below. Direct Observations - Several recently built plants were visited throughout the state and Observations made on plant oper- ations during the harvest season. The data collected from these plants covered a wide range and to maintain consistancy the same data were collected from all plants visited. Two plants were visited in the cash crop thumb area, two were visited in the central part or the lower half or the lower penisula, and one each was Visited in the southeastern and south- western part of the state. Since the plants visited were all located in different parts or the state, their overall Operations varied widely but the grain merchandising enterprise was found to be similar in each plant visited. . Time studies were made on various Operations at each or the plants visited to Obtain labor requirements, equipment capacities, and delays, both normal and during the harvest season. The pri- mary purpose or these timings was to 11nd the time required for the various Operations within the plant. Timings were made on all grain moving and cleaning equipment. The time required by the Operator to perform various operations was also Obtained. Operating as well as delay time was Observed at all phases Of the Operation. Position and unloading times were Obtained for dif- ferent types and sized farm vehicles. Timings were also made on the time required to prepare boxcars for loading. (N -44- In addition to the various timings and Observations made at each of the plants visited, the manager was also asked a series of questions pertaining to the plants actual operation. They supplied much of the necessary data on such things as wages for various types or labor and general operating conditions. An inventory was made or all the equipment round within the plants visited. This inventory included the location Of the ma- chine, a Sketch, its operating characteristics and any Other perti- nent remarks. This inventory was used in determining the required equipment for the mOdel plants. Equipment Manufactures - The equipment required for the syn- thetic plants was determined irom data Obtained when the various plants were Visited. The equipment needed by each or the various sized plants was listed and equipment manufacturers and their catalogs were consulted as tO specifications and price. This information was then used in making the cost estimates for the machinery and equipment used in the model plants. Engineering Estimates Of Building Cost - Several contractors were visited throughout the state to Obtain information about specifications and model plant designs. These specifications and the data Obtained from direct observations were then used to de- velop the designs for the various model plants. The actual costs of elevators constructed in Michigan during 1960 were obtained. The costs of constructing the model plants including silos, were estimated by using this cost data in con- Junction with the specifications obtained from the contractors, equipment specifications, and engineering requirements. -45- Plant Records and Audits - Additional information was obtained from plant audits. These audits were not used for specific cost data. They were used to get some indication Of the relationship between various cost categories and total Operating cost. Other Sources of Data - The previous studies made pertaining to the Michigan elevator industry were also used to advantage in several phases Of this study. These studies were used primarily as guides in the develOpment Of the model plants. Personal contacts with people actively engaged within the elevator industry provided valuable assistance in the development of the model plants and in estimating the various Operating costs. These contacts included contractors, equipment manufacturers, and their representatives, insurance companies, managers and employees of local elevators and related businesses. In addition, people who have done previous research in this field were also able to provide and make many valuable suggestions. The department of agricultural engineering at Michigan State University was also called upon for suggestions in the development of the model plants. They were especially helpful in checking the engineering feasibility of all phases of the model plants. Assumptions This study was based on certain assumptions pertaining to the Michigan elevator industry and the conditions found within this industry. The model plants and the various operating condi- tions used were based on these basic assumptions. -46- As to Operating Conditions - It is assumed that the grain merchandising enterprise is Operated the same throughout the state. The only difference between plants is in physical size and importance depending On the location and agricultural condi- tions surrounding a particular plant. As to Size Requirements for Michigan - The model plants developed for this study were assumed to cover the range of sizes now found in Michigan as well as the size of those which might be built in the near future. As to Location Factors - The environmental conditions sur- rounding a particular plant will determine the most economical size of plant to be used in that particular area. However, analy- sis related to location is not included in this study. It is assumed that management will determine the location factors in an area before deciding on the scale of plant to be constructed in that area. The model plants develOped in this study lend themselves to this assumption in that they differ-only in size and were devel- Oped according to the existing conditions found within Michigan during 1961. The model plants are therefore applicable to any area of the state. Differences may exist, however, between areas in the cost of labor, power, and other factors of production. As to Storage Requirements - The storage provided for the model plants was assumed to be adequate for the merchandising process for which the model plants were develOped. As to Economic Model and Conditions - The economic problem studied was formulated in terms of cost efficiency criteria. The l- v..— -._- - ._._. _._._ - 0 ~ ”4 —_ \, .fi. ‘qfiifl "7— A...” -47- firms were assumed to operate in a perfectly competitive market, and the economic model employed was that of static production economics. The assumptions of this model pertaining to static production functions, consumption functions and institutions; those which eliminate random elements; and those concerning moti- vations were maintained. CHAPTER Iv MODEL PLANT SPECIFICATIONS AND OPERATING CONDITIONS Model Plant Receiving Capacities and Facilities Provided There are many ways of measuring plant size as related to capacity. The most commonly used is either storage or handling capacity. Since this study is directed to grain handling the latter is a more relevant measure of capacity. The grain cleaner was therefore used throughout this study as the primary determi- nant of plant capacity. The grain cleaner determines the rate at which a plant Operates, provided there are no bottlenecks to hinder or slow down the receiving and loading out processes. The model plants rated capacities are based on discrete cleaner sizes. All other machinery and equipment was then selected in such a way that its operating capacity coincided with that of the grain cleaner. Grain cleaners come in a wide range of capacities and makes. A general purpose cleaner, capable of handling the several commod- ities received by Michigan elevators, was selected for this study. Cleaners were selected in six rated capacities ranging from 1000 to 6000 bushels per hour. It was apparent, however, in making time studies at the elevators visited that grain cleaners cannot be operated at the manufacturers rated capacities. A considerable range in Operating rates was observed with the maximum being around 75 percent of the manufacturers rated capacities. The rated capacities of the model plants used throughout the remainder -48- -49- of this study are therefore as follows: 750, 1500, and 2a50 bushels per hour single-line plants, and 2250, 3000, 3750, and 4500 bushels per hour double—line plants. The plant capacities used throughout this study cover the more common plant capacities found within the Michigan elevator industry. However, the large plant capacities, especially the 3750 and 4500 bushel per hour plants, are rather large and uncommon for Michigan grain elevators.l They were included as representing sizes which might be considered in future years. They should also serve as valuable planning guides and as a means of comparing the relative efficiencies of the smaller plants. It was also observed that equipment, other than cleaners, found in an elevatOr is not operated at the manufacturers rated capacity. The speed with which the shaker pit is emptied depends primarily on the elevating leg which removes the grain from the pit and elevates it to the cleaner floor. The speed and slope of the shaker pit also had some affect on its capacity. Elevating legs are usually Operated at about 90% of their rated capacity. Elevator leg capacity depends on many factors such as, cup size, spacing of cups on belt, speed at which the elevator is Operated, material being handled and the degree of cup capacity utilized. The elevating legs used in the model plants were calcu- lated at 90% of the manufacturers rated capacity. Manufacturers recommendations were followed in regards to bucket size, spacing and speed of Operation but, cup capacity was computed at 90% of the manufacturers volume. A similar procedure was followed in estimating the required capacity of all screw conveyor systems. -50- Corn handling equipment varies in operating rate depending on the moisture content of the corn being processed, the degree of husk and other foreign material, the speed at which they are operated, and the size of ear corn crusher or corn sheller. It was observed that the ear corn crusher, under reasonably favor— able conditions, was capable of being Operated at the manufac- turers rated capacity. Corn sheller manufacturers usually list the capacity of corn shellers as a range rather than as a certain per bushel capacity. The low capacity corresponding to very wet corn and the high capacity corresponding to very dry corn. It was observed that shellers Operate within this range depending on the moisture con- tent of the corn and whether or not an ear corn crusher preceded the corn sheller. Ear corn crushers preceding the corn sheller usually increase the recommended capacity of the sheller from 15 to 20 percent, again depending on the moisture and foreign ma- terial content of the corn. Ear corn crushers also have many other Operating advantages such as, preventing scrape iron, stones and other foreign material from entering the corn sheller. The model plants were therefore equipped with ear corn crushers Oper- ating at the manufacturers rated capacity and corn shellers Oper- ating at 90 percent of the dry corn rated capacities. The remaining equipment, which was primarily gravity flow equipment, was selected so that there would be no bottlenecks. ‘Gravity flow spouts, distributors, bin slides and shut-Offs, and load—out spouting were all selected according to engineering recommendations and specifications, spout diameter being the primary consideration. -51- The discussion thus far has been in terms of the discrete sizes of various pieces or equipment. However, the exact size of equipment desired was not available in all cases. In those cases the next largest size was selected. Larger capacities were selected in all cases to avoid bottlenecks. Garner nine or hOppers were then provided at convenient places to help even out the flow or material through the plant and to take up some or the slack created by the imperfect synchronization of certain operations. The procedure followed in this study was to develop and design the model plants as though they were grain handling Oper- ations. The corn receiving and shelling operation was then designed to fit the plant. The same intake leg could be used by using a corn receiving and shelling capacity or 50 percent or grain handling capacity. This permitted the use Of ear corn crusher and sheller sizes that were readily available and easily synchronized into the plants overall operation. The model plants used throughout this study are therefore synchronized with respect to handling all small grains except ear corn on a shelled basis. Ear corn receiving capacity, on a snelled basis, is limited to 50 percent or the grain receiving capacity.25 If the corn shelling capacity or the model plants was to be synchronized with the cleaning capacity of the model plants larger intake legs, more than one sheller, and larger ear corn d5 One bushel of shelled corn (50 pounds) is approximately equiv- alent to two bushels (70 pounds) of husked ear corn. The plants are therefore able to receive only half as much corn on a shelled basis as on an unshelled or ear basis. -bz- crushers would be required. These are all possible and could be provided if so desired. Several shellers could be used as a group, larger intake legs are available, and large double-roll ear corn crushers are also available. These double-roll ear corn crushers have about twice the capacity or single—roll crushers and have many additional operational advantages. How- ever, if ear corn receiving is the primary function to be per— formed by the elevator, then plant designs other than those used in this study should be investigated. Ear corn receiving capacity, on a shelled basis, is computed at 50 percent or the grain receiving capacity or the mOOel plants. This appears to be reasonable in light or the fact that corn har- vest usually does not proceed as rapidly as grain harvest and is not as important a cash crop as other grains. Large amounts or the ear corn produced within the state are retained on the farm to be utilized as feed or stored in cribs to be sold in the spring or the year. This puts less pressure on the local eleva- tor at corn harvest and reduces the need for large corn receiving capacities. Another important development affecting corn harvest is the increasing use Of field picker shellers. The use Of these machines is increasing in Michigan and eliminates the need for local elevators haVing large crushing and shelling capacities. Shelled corn received by the local elevator is processed in the same manner as other small grains. The ear corn crusher and sheller no longer are a limiting factor when receiving corn. -53- Another practice that is sometimes followed in receiving corn which reduces the need for large corn receiving capacities is the scheduling Of corn shelling activities in the Spring. This practice is followed to assure a steady flow of material through the plant and to eliminate line-ups and long waits during the spring when farmers are removing their ear corn from storage cribs. The major difficulty encountered when following this practice is that usually all farmers in an area find it conve- nient to move their corn at about the same time. Single and Double-Line Plants Double as well as Single-line plants are common to the Michigan elevator industry. A double-line plant has two receiving pits, intake legs and grain cleaners as opposed to only one in the single-line plants. The model plants developed in this study include both single and double-line plants. The smaller plants (750 and 1500 bushel per hour plants) were both single-line plants and the larger plants (3000, 3750 and #500 bushel per hour plants) were all double-line plants. The 2250 bushel per hour plant, which was found to be a very common size in Michigan, was included both as a single and a double-line plant. The need for more than one receiving line arises because of the time required to position and unload a vehicle of a particu- lar size. As the single-line plant capacities were increased they were equipped to receive and clean more grain than it was -54- physically possible to unload in a given period of time. It is uneconomical to have a plant equipped to handle more material than it can possibly receive. A double-line plant also adds some flexibility to the opera- tion. With only one cleaner it becomes necessary to change the cleaner's screens every time a differenct commodity is received. The greatest advantage of double-line plants is during the harvest season when large volumes are handled in relatively short periods of time. With two receiving lines the number of vehicles that can pass through a plant of a particular size is increased, thus increasing the volume of material handled. Storage Facilities The storage facilities found throughout the state vary widely between elevators and localities. These differences are found not only in the size and amount of storage provided but also in the various kinds of storage facilities provided. Several factors determine the amount of storage provided at any particular elevator. Among these are the length of time that material is to be stored, number of crops handled by the eleva- tor, amount of blending to be done and the amount of processing required by the commodity under consideration. Most Michigan elevators do not store grain any longer than from one harvest season to the next. A common practice is to store only enough for their own needs and to empty all storage bins before the next crop is harvested. However, feed crOps may be stored for longer -55.. periods of time because they are sold to farmers in the area and are sold over a period of several months. Navy beans require more processing than other crops and may require a longer storage period. The model plants developed in this study were assumed to be primarily assembling plants. Adequate storage was provided to accomplish this assembling process without regards for permanent or long term storage arrangements. Each model plant was equipped with at least six storage bins to provide adequate flexibility for receiving and handling several different crops. The storage facilities provided ranged from 20,000 bushels for the 750 bushel per hour plant to 120,000 bushels for the 4500 bushel per hour plant. The storage was increased between model plants in 20,000 bushel increments. Table 3 shows the number Of bins and total storage capacity pro- vided for each of the model plants. These amounts were provided on the basis of maximum potential. storage requirements during the harvest season. The storage facilities provided for the model plants were all concrete stave silos with hoppered bottoms for self cleaning. The size of bins used were pOpular sizes found in many parts of the state. Railroad Siding Very closely associated with the amount of storage provided are the facilities needed for spotting railroad boxcars. It was -55- Table 3:-- Storage Facilities Provided for Model Grain Elevators, Michigan, 1961. Number Approximate Total Plant Capacity of Capacity Storage Bins Per Bin Capacity ‘IBEP.H.7* (Bushels) (BuShe187 750 B.P.H.- Single-Line 6 3,333 20,000 1500 B.P.H.- Single-Line 6 6,666 ' 40,000 2450 B.P.H.- Single-Line 6 10,000 60,000 2250 B.P.H.— Double-Line 6 10,000 60,000 3000 B.P.H.- Double-Line 8 10,000 ' 80,000 3750 B.P.H.- Double-Line 10 10,000 100,000 4500 B.P.H.- Double-Line 12 10,000 120,000 assumed that the primary means of shipping grain from the model plants would be via railroad boxcars. Enough railroad siding was provided so that the elevators could Operate at capacity during the harvest season. Assuming that boxcars were avail- able and that at least one switch was made per day by the rail- road company. I The amount of railroad siding was estimated by determining how much grain could be loaded out each day if plants Operated a 10 hour day at full capacity. Table 4 shows the number of boxcars for which space was provided at each plant. Adequate track was provided for switching, for holding filled boxcars in front of the loading spout, and for holding empties behind the loading spout. -.-_‘. -57... Table 4:--Railroad Siding Provided for Model Grain Elevators, Michigan, 1961. Plant Capacity Number of Railroad Boxcars to Be Spotted at Each of The Model Plants (B.PIH.) 750 B.P.H. - Single-Line 4 1500 B.P.H. - Single-Line 6 2250 B.P.H. — Single—Line 8 a250 B.P.H. - Double-Line ' 10 3000 B.P.H. - Double-Line 12 3750 B.P.H. - Double—Line 14 4500 B.P.H. - Double-Line 16 Land and Land Improvements Though economic engineering studies Often omit land costs they are included in this study because they are an important factor to be considered in the overall planning of any particular elevator. Land provided for the model plants ranged from 2 acres for the smallest plant to 45 acres for the largest. This includes adequate space for buildings, storage facilities, railroad siding and driveways. The greatest demand for land is not for the actu- al building site, but for adequate space to prevent bottlenecks and to maintain a uniform flow Of material into the plant during the harvest season. Improvements included driveways, fences, side- walks and landscaping. - . w 4.— '_M (- _ - . ...._ V ‘ ._.- . - . - .__-_.__ _. ._... m -__._.. - _ \-/ . . ._... - -_. , .____.- ,_-fi___._ . 9 a \ 7 n o - I o a o . , . a u 1 - _ o o . o o . . ~ 0 1. ..._. -_. l..__..-.__-_. -...-._--_..- “i- r _. -.__-_-. _ ,g... - . l- . .-___~ I v ‘H '7 ‘7, \ 7.... —.——.«-_—_. _55- TruckingyEquipment Each model plant was equipped with one two-ton truck with grain box. The truck was included as part of the plants Oper- ating equipment and not as a means Of transporting grain long distances or as a source Of income from such activities. Its primary use is for the removal of screenings, transporting grain short distances, and as a means or power for moving railroad box- cars 0 Office-Facilities Each plant was equipped with Office facilities and furnish- ings. The Office space provided was assumed to be adequate for the grain merchandising Operation only. The offices or plants were not equipped with a large truck scales. It was assumed that all material received and loaded out by the plants would pass over the auto-matic in-plant scales. Model Plant Operating Conditions In the short-run only part of the factors determining cost can be varied. Some of the input factors, e.g., land, buildings, heavy machinery and top management, are assumed tO be physically fixed and not capable of immediate adaptation to changes in rate of output within the short-run limits of flexibility. These are the firm's short-run "fixed resources" and are the durable fixed assets referred to in this study. These fixed resources determine -59.. the scale or size or the firm's plant. The scale or plant sets the upper limit (maximum capacity) to the amount or output per unit or time which the plant is capable Of producing in the short- run. Output can be varied up to that limit in the short-run only by increasing or decreasing the quantities of "variable resources" 26 The fixed resources there- used in the fixed scale of plant. fore determine the upper limits or prOduction but the quantities or variable resources used determine the level or prOduction or the degree to which maximum capacity is utilized. The Iixed expenses associated with owning a plant 01 a par— ticular hourly capacity normally remain at a relatively constant level from year to year regardless of volume.‘7 However, as out- put or prOduction approaches capacity the per unit cost or hand- ling grain declines rather sharply with increases in volume. Thus, it is to elevator management's advantage to plan and pro- vide facilities which can handle expected volume increases and then to plan to use the facility as near capacity as is possible. The firm's variable resources are input factors such as labor, power, raw materials and the like which can be varied in the short-run. These variable resources are or major importance because output can be increased or decreased in the short-run primarily by increasing or decreasing the quantities of variable a6 27 Leftwich, op.cit., page l40. Capacity here refers to the plants rated hourly receiving rate. Annual capacity is a function or this hourly rate and annual hours Of Operation. \_/ ‘N -50- resources used in the fixed scale or plant. The operating condi- tions which affect and determine the use Of the various variable resources are discussed below. These are also the factors which determine the total annual volume handled by the model plants. General Operating Conditions It was assumed that the model plants were operating in a competitive environment. It was assumed that the price of all variable resources was constant and that no differences existed within the state. The conditions used throughout this study, which affect cost, are scale or size of plant, annual hours of operation, receiving mix and average load size received. Each of these and their affect on operating cost and annual volume are discussed separately. Plant Scale and Annual Hours of Operation Plant scale or size Of plant affects operating cost and annual volume handled because, as pointed out above, it sets the upper limit to the amount of output per unit of time which the firm is capable of producing in the short run. This is Often referred to as the rate dimension and is concerned only with annual volume as affected by the plants hourly rated capacity. Annual volume can be increased or decreased by changing the rate at which the plant Operates, holding the number of hours Oper- ated, load size and product mix constant. This, however, is not -61- the only means of Obtaining a desired annual volume. French refers to this other method as the time dimension and points out that a failure to distinguish clearly between the rate and time dimension leads to confusion concerning the nature of cost curves.28 For the purpose of this study the rated capacity of the model plants serves as the rate dimension and the annual hours Of operation serve as the time dimension. The different rates shOw that each of the model plants has a different hourly receiving capacity and that each could achieve a different annual volume provided they were all Operated the same number of hours per year. The time dimension refers to the fact that annual volume could also be increased by increasing the number of hours of annual Operation, while holding the plant rate, load size and mix constant. A plant with a low receiving rate could possibly receive as much material in a given year as a larger plant sim- ply because Of a difference in the number of hours Operated per year. There are therefore two ways of looking at annual volume. First by how much material it is possible to receive in any given hour of operation, or the plants receiving rate, and second by how many hours a year the plant Operates at a given rate. The rate dimension is Of major importance to agricultural processing plants which are affected by the seasonal nature Of agricultural production. This is especially true with those firms which process the highly perishable commodities and to a 38 French, et.a1., Op.cit., page 548. f\ -52- lesser extent with firms handling the storable commodities such as small grains. The seasonal nature of agricultural production requires that agricultural processing plants be equipped to handle rather large volumes in relatively short periods of time. Many agricultural processing plants are equipped to receive large seasonal volumes and Often Operate only a few weeks or months each year. To a degree this is also true with the eleva- tor industry. However, because of the storable nature of small grains and because of sideline activities they usually remain open the year around. They are nevertheless faced with the prob- lem of being equipped to handle large volumes during the harvest season as Opposed to having a lower receiving rate and operating more hours per year. Elevators usually add part time labor during the harvest season so that the plant can be operated as near capacity as is possible. At the same time they Operate many hours per day (as high as 18 or 20 hours) and for as many days as required to complete the harvest seaSon. Elevator management usually follows a practice of using both the rate and time dimension to obtain the desired annual volume. A rated capacity is selected that makes it possible to handle the harvest rush in the limited time available and still not so large that great inefficiencies are present at other oper— ating times. This is also an advantage of having double—line as Opposed to single-line plants. During the harvest season both lines can be Operated as near capacity as possible but at other times only one line need be Operated. -63_ For the purposes Of this study both the rate and the time dimensions were used. The annual hours of Operation used for the model plants were 300, 600, 900, 1200 and 1500 hours per year. This includes only the time during which the model plants are actually Operating or receiving grain. The model plants are however assumed to operate the year around. The difference between these annual hours of Operation and total annual hours is idle time. Each model plants annual volume and total annual cost were therefore calculated for these annual hours of opera- tion. Since elevators operate the year around, as Opposed to Oper- ating only during the harvest season, an adjustment had to be made in the annual hours of Operation to allow for the harvest season. It was therefore assumed that each of the model plants would Operate the same number of hours during the harvest sea- son regardless of size or total annual hours of operation. One hundred hours was therefore allocated to each model plant as time spent during the harvest season. The remaining time being allocated as non-harvest season Operating time. The 100 hours harvest season applies only to grain harvest and not to corn harvest. The affect of harvest season hours on annual volume is discussed below. Receiving Mix The grain merchandising Operation of the model grain eleva- tors are multi-purpose in nature. This fact requires that some +4 -64- distinction be made between the annual hours of operation as to time spent on receiving the different commodities. The receiving, mix used throughout this study refers to the allocation of the total annual hours of operation to receiving grain and ear corn. Three receiving mixes were used throughout this study, they were: 75% grain and 25% car corn, 50% grain and 50% ear corn, and 25% grain and 75% ear corn. Receiving mixes of 100% grain or ear corn were omitted because plants designed for one purpose or the other do not exist within the state nor is it likely that this high a degree of regional specialization will occur. The actual. hours of Operation allocated to receiving grain and ear corn for the various annual hours of operation are shown in table 5. Average Load Size Received An important factor affecting annual volume and annual oper- ating cost is the average load size received. This factor is of even more importance when one considers that management has no control over the size or type of vehicle used by farmers. The elevator must therefore be equipped to handle very large loads as well as the very small loads. The average load sizes used throughout this study were 75 bushels, 150 bushels and 225 bushels. Seventy loads of wheat actually received during plant visitations averaged 140 bushels per load. The range was from a low of 20 bushels to a high of 420 bushels. Average load size was found to be important because it was observed that it takes about as much time to position and unload ._... ”I .r? - 65- W ,,.,,{N V \ Table 5:--Allocation of Operating Time to Receiving Grain and Ear Corn According to Receiving Mix and Total Annual Hours of Operation, Michigan, 1961. Hours of Operation O 0 Receiving : : . u . - 300 Hours: 600 Hours: 900 Hours:l200 Hours:l500 Hours Mix :Grain:Corn:Grain:Corn:Grain:Corn:Grain:Corn:Grain:Corn lHrTTHFI IHr) IHfl (Hr) (Hr) pm pm lHr'TlHfi Receiving: Grain 75%: of the : Time and : Corn 25% : of the : Time : 225 75 450 150 675 225 900 300 1125 375 Receiving: Grain 50%: of the Time and Corn 50% of the Time : 150 150 300 300 450 450 600 600 750 750 O. .0 Receiving Grain 25% of the Time and Corn 75% of the Time. 0. .0 .0 O. O. O. .0 .0 75 225 150 450 225 675 300 900 375 1125 a small load as it does a larger load. This becomes important when one considers that a large number of small loads would be required to maintain the hourly capacity of the mOdel plants. whereas, only a few large loads would be required to maintain the same capacity. The average time per load for the 70 loads observed was 6 minutes and 20 seconds. This includes only the time required to -V.....___._. —_.v. . M..- ~—. -6o- position and to actually unload the vehicle. It should be noted that many things contribute to the speed with wnich a particular load can be received. Many 01 these depend on the individual Iarmer and the type or vehicle he uses to haul his grain. Such things are beyond the contrOl 01 management and in many cases little can be done to speed up the receiving process. It should also be noted that the above Observations were made during the harvest season when the elevators were operating beyond a normal rate. These observations do not include the delay time Observed between loads. Table 6 shows the actual hourly receiving rates Of the model plants when receiving grain and ear corn in the- different average load sizes. Average load size received was also found to be a determining factor as to whether a single or double-line plant is best. The starred rates in table 6 show the different situations where the aCtual receiving capacity Of the model plants was limited because Of the time required to dump grain. It should be noted that even with a double-line plant the actual receiVing rates were limited, in some cases, when receiving 75 busnel loads. If these model plants were all single-line plants, the hourly receiVing capacity would not exceed 727 bushels per hour, regardless Of the plants rated capacity.' Seasonality and Its AIfect on_9perating_Grain Elevators Large volumes of material pass through grain elevators in relatively short periods of time. This is due to the seasonal -57- Table 6:--Actual Hourly Receiving Rates for Model Grain Elevators Receiving Grain and Corn in Various Average Load Sizes, Michigan, 1961. : Average Load Size for Receiving Grain and Corn Plant : : i. : 75 Bushel Load : 150 Bushel Load: 225 Bushel Load Capacity' : : : : Grain.: sCorn : Grain : Corn : Grain : Corn (BPH) (BPHT : (BPH) : (BPH) . (EPH) :TBPHT Single-Line : V 750 B.P.H. : 554 319 611 336 632 342 1500 B.P.H. : 727* 554 1029 611 1091 632 2250 B.P.H. : 727* 727* 1190* 837 1440 878 Double-line : 2250 B.P.H. : 1454* 890 1674 960 1756 986 3000 B.P.H. : 1454* 1108 2058 1222 2182 1264 3750 B.P.H. : 1454* 1281* 2219* 1448 2531 1510 i 1454* 1454* 2380* 1674 2880 1756 4500 B.P.H. Corn here refers to shelled corn. doubled to obtain the ear corn equivalent. shelled corn (56,pounds) is approximately equivalent to two bushels (70 pounds) of husked ear corn. These figures should be One bushel of In these cases handling capacities were limited because of the time required to position and dump incoming loads. The plants in these instances are equipped to handle more grain than it is physically possible to dump. nature of the harvest and because of the speed with which it is now accomplished. The elevator therefore finds it necessary to be equipped to receive as much grain as is possible in the few days that the harvest season lasts. ——— ._.._ ..__ m - fl... - .___ .fi- -— -.. - W Mu- - H.- I — .———- l . e - - -—. A r— *— .~.—_ . ”.— .—_~ - -... _ ~— - - - - .~— 0 _._._ .w—__._, l . a t . . n -68- The receiving phase often creates a bottleneck because of the time required for the farmer's vehicle to be positioned, unloaded and moved through the receiving process. The load-out phase creates delays if the receiving process has to be stopped while operators prepare boxcars or trucks for loading. There- fore, additional labor is usually added during the harvest sea- son to help with the receiving process, to board up boxcars, and to help with the loading out process. It was assumed that material would arrive at the plant, during the harvest season, at a rate that would maintain the actual hourly receiving capacities shown in table 6. It was assumed that during non—harvest periods material arrives at the plant at a rate no faster than that which could be handled by a "normal" labor force, consisting of one or two men, depending on plant size, who operate the entire plant and all of the vari- ous technical phases making up that plant. Since a continuous flow of material is no longer a necessity certain phases are operated independently. Certain of the operating phases need not and usually are not operated as a unit during non-harvest periods.' The receiving and loading out phases can be operated as individual Operations because of available storage. These operations can be performed independently without interferring with the other three phases of the operation. The delay time between these two phases and the other three phases may be only a few minutes or as high as several months in the case of loading boxcars or trucks. Cleaning, weighing and storage are usually operated as a unit because once -69- the material starts through the cleaning process it does not stop, except for temporary delays, until it reaches the storage bins. . During these non-harvest season periods the elevator opera- tor usually helps the farmer dump his grain. He then adjusts and starts the various equipment necessary for the cleaning, weighing and storage processes. While the material is being cleaned the operator may do one of several things. He will have to attend the screenings, he will have to adjust and watch the cleaner, he wil have to test the grain for moisture and test weight, he will also have to prepare a ticket and weigh the par- tial draft. One man cannot possibly accomplish all of these tasks while the grain is being cleaned. A common practice is to dump the load, start the cleaner and do those tasks that can be done while the grain is being cleaned, leaving those tasks for which he does not have time until the entire load has been cleaned. This includes such things as testing for moisture, testing for test weight and writing the farmer's ticket. There may then be a several week delay before the material is actually loaded out, depending on the time required to assemble a boxcar or truck load. Annual Volume as Affected By The Model Plants Operating Conditions Tables 7, 8 and 9 show the total annual volume for each of the model plants operating under each of the various Operating conditions. It should be noted that annual volume changes not -7o- “dendfipsoov seesaw cangloaasoo O. O. 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Asmv . Asm- . Asmv Aamv . wsm- . Wsm- m .m.m.m oome m .m.m.m omen m .m.m.m ooom m .m.m.m ommm .m.m.m ommm m .m.m.m oomH m .m.m.m one m 1M use soapshmmo .mqussoam macaw Hove: csaqloapson and oamdam mo hpaommso 111 no uaaom andssd 0.... \m .emsaapqoonaaooa .qsmaaosz .ossa ens mo paoowom ms awoo ass owns on» no passwom mm ensue wswsaooom one wdowpfidnoo mdoaasb noddb wagesa0902mHOpm>mHH Gamma Homo: pow oESHob Handed Hmpoell.m capes -75- only between the various sized plants operating under the same conditions but also as the receiving mix is changed, as the annual hours of operation are changed and as the average load size received is changed. Annual volume is therefore a function of: (l) The scale of plant, which sets the upper limit to the hourly receiving capacity. (2) The annual hours of operation, which influences the annual volume from a time dimension and from which the harvest season hours and receiving mix were calcu- lated, both of which affect annual volume. (3) Receiving mix, which determines the annual hours that wheat and ear corn were received. Total annual volume of wheat and corn, on a shelled basis, is a function of the actual receiving rate and the number of hours that each is received, and (4) The average load size received, which in part determines the actual hourly receiving rate of the model plants and which has an affect on the total annual volume received. CHAPTER V BUDGETING OF COST AND MODEL PLANT COST FUNCTIONS Introduction Accuracy of budgeting expense items in a model operation depend on intimate knowledge of actual operations and practical Judgment. In building the model elevators used in this thesis the individual consideration of each item of expense was assumed to be the most accurate procedure to follow in estimating the various expenses. The description of and the reasons for pro- cedures used by individual items of expense, have been confined to Appendixes A, B, and C. All operating costs are grouped into fixed and variable expenses, fixed expense items being those related to property and facilities (durable assets) and their valuations. Their amount is not influenced by the amount of annual volume. Vari- able expenses make up the balance of the elevators' Operating expenses and change in varying degrees with volume and manage- ment decisions. The various items included in each of these categories are discussed below. Investment In Durable Assets Budgeting of investment in durable assets represents the basis for computing fixed costs. 'The assets included in this category are: land and land improvements, buildings (commonly called the plants work area), storage facilities, machinery and equipment, cob burner, railroad siding, trucking equipment, -77- -73- office building and office furnishings. Machinery and equipment is the largest single investment item. Investment in machinery and equipment was estimated for each Operating phase Of each model plant. Included in this estimate is the cost of machinery installations which amounted to about A0 percent of the list price of the equipment. Mis- cellaneous equipment was also estimated and included. A de- tailed list Of the machinery and equipment provided.fOr each phase Of the model plants Operations and the associated office equipment are included in Appendix A. Table 10 shows the total installed cost of equipment for the various operating phases and for the entire 2250 bushel per hour double-line model plant. Total annual equipment depreci- ation is also shown in table 10. Table 10.--Total Estimated Investment in Machinery and Equipment and Total Annual Depreciation For A Model Double-Line Grain Ele- vator, 2250 Bushel Per Hour Capacity, Michigan, 1961. Operating Phase Igiiiligg nepiggiiilon ' Equipment (dollars) (dollars) Receiving $ 8,922 . $ 480 * Cleaning 41,193 2,417 Weighing 8,L59 630 Storage 13,700 730 Load-Out 12,039 695 Miscellaneous Equipment 3,056 238 -79.. Table 11 shows the total estimated investment in durable assets for the model plants used in this study. The details as to procedures used in making the various oast estimates are shown in Appendix A. Cost Associated With Owning Durable Assets This category includes all those fixed costs associated with owning the physical assets discussed above. These fixed costs have no relation to the plants actual operations and are based entirely on the total investment made in the various dur- able assets. The fixed expense items used are: insurance on buildings, equipment and truck; depreciation on buildings and all equipment; maintenance and repairs; personal property taxes; and interest on investment. These fixed expenses were estimated on an annual basis. The actual estimates and estimating tech» niques are presented in Appendix B. These are all expense items based on valuations or a specific service necessary if the plant is to Operate. They are not associated with volume Changes. Once they are fairly well established for a Specific plant, they are not subject to change from year to year by management. Thus, their amount has a fixed character for a given plant in relation to the various volume situations that may prevail for that plant. Depreciation expense was by far the most important item included in this cost category. The depreciation expense for each fixed asset was estimated separately and as accurately as possible. The techniques used are the same as those now being -80... .mfid com... a .m.m.m omhm « . a . .m..m.m ooom « .m.m.m ommw ” .m.m.m omNN « .m.m.m oomH » .mom.m omh « u u a 38000» E E 5.30% omega» madam» Swan» m 30.... 3.1: m5... m2... 0.3.0 . 20.0 £3” 088 M $8.33 8GB 83a 83a 08.3 08$ 00} 08.... 83. 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Insurance costs are based on the actual durable asset cost estimates and are based on rates in effect.during 1960. Personal property tax.was calculated for each model plant according to data obtained from elevators now operating in Mich- igan.- Property tax varies widely within the state and the exp pense included here was calculated at an average rate which was representative of state conditions. Total repairs and maintenance expense was broken down into variable and fixed categories. The fixed expenses included here are for those repairs and maintenance which show no relation to the plants operation or volume handled.. This includes such things as the painting of buildings and an estimate of general deterioration associated.with time. The repairs and mainte- nance included as variable expenses include the upkeep and replacement of parts caused by actual operations and volume handled. This includes spouting replacement, electric motor repairs, and any worn machinery parts. These costs are dis- cussed in detail under the variable cost category. Interest on investment or on long-term capital differed from interest expense commonly found in Operating expense statements since it includes an interest return to equity capital. Interest on seasonal capital is included as a variable expense because it is needed primarily during;the harvest season and depends on the average annual inventory maintained. To keep the models on a comparable basis, in- terest expense was calculated on all long-term capital. Long term capital here refers to the total investment per model plant in fixed durable assets. Fixed costs of depreciation, insurance, personal pro- perty taxes, repairs and maintenance, and interest on invest- ment are summarized in table 12. ‘Iggiable Cost Associated With Volume and Plant Operations This category includes the cost of all variable resources associated with the plants actual operations and volume handled. Variable expenses change in varying degrees with changes in volume and management decisions. The degree of variation differs sharply among the various expense items. That is, some expenses, respond slowly to volume and size changes while others respond more prOportionately to such changes. For this reason, each variable expense item was budgeted separately, see Appendix C. Such expenses as utilities, advertising, donations, auditing, repairs, directors' fees, and travel fall within the group that do not vary in direct relation to volume. They are often characterized by a minimum, either actual, as in the case of electric power, or set by the manager as in the case of advertising or donations. 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V. lev u I - Q-I ‘ ‘ 'ol 0 'II. 010-. ,‘0 v I. '.‘ - .v.. I“l‘.ln -91- Some of the individual expense items included in this category vary as each of the four operating conditions are varied. Power and lights for example are a direct function of plant size, hours of operation, receiving mix and average load size received. Others vary only as certain of the oper- ating conditions are varied. Maintenance expense is a function only of plant size and hours of operation, whereas, interest on seasonal capital and inventory insurance are a function of plant size, hours of operation, and receiving mix. The reasons for these differences plus the details and procedures used in estimating the variable resource requirements and costs are shown in Appendix C. Total Annualrgost and Total Cost Functions, Total annual cost for the various model plants, operating under the various conditions set forth, are shown in tables 16, 17, and 18. The total annual costs shown in these tables were obtained by adding the total annual fixed costs from table 12 and the total variable costs from tables 13, lb, and 15. The cost shown in tables l6, l7, and 18 are for the correSponding annual volumes shown in tables 7, 8, and 9. 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C. 0+ 0. u o. showmboafi momma Hodoz oaaquoapson dam oamnom Mo hpaomQMO amo.om ocm.em moo.oo oma.oo omm.oo ooc.mo omm.om m macamcm omm mmo.oc ooe.cm moc.oo moo.co mom.me moa.mo oom.om m cacamsm coa ooo.co moo.ec ocm.mm moo.mc mao.o: mem.mo cmc.cm m macamsm om m "mascm ccoa occ.om oao.mc cac.co ooa.cs soo.co . sea.oo omm.mm m macamsm omm coo.om ooo.mo aoe.cc coo.mo aon.ao com.om aoo.mm M macawsm coa. % momma cocoa oosooo emoioo mooooo mcoooo 235% m 323m om “ ”modem ccma Amacaaonv . Amsoaaonv . Aoaeaacnv . Amacaaonv Amacaacnv . aoaeaacov . Ammaaaonv m .m.m.m coo: m .m.m.m comm m .m.m.m coco m ..m.m.m comm m .m.m.m ccoa m .m.m.m com m H a, m .cossasaocunacoa .scmanuaz .oaaa on» mo snoouom om aacc one oaaa was mo socoacm om nacho moa>aooom dam uncapacnoo qpoaaap Macao moapmaomo amoumboam Gamma Hocoz mom pmoo Hmsqd< Hmpoatl.ma magma -93- of the same factors as total annual fixed and variable costs. The relationship of the synthesized total cost to out- put was very nearly a linear relation in all cases. Figure 3 shows the linear relation of total annual cost to total annual volume for the 750 bushel model plant. It should be noted that the total cost curve for receiving 75 bushel loads,*with the 75/25 and 50/50 mixes, rises sharply at the higher levels of output. At the same time the total cost curves for re- ceiving 150 and 225 bushel loads, with a 25/75 mix, slope downward at the lower levels of output. Similar cost functions, as those shown in figure 3, were observed for all model plants. Figaro A shows the total annual cost curves for the 1.500 bushel per hour plant. The kinks ob- served in the 150 and 225 bushel load total cost curves were due to indivisibilities caused by the addition of another full time man. The additional labor charge caused the total cost curve to rise with a new slope at these points. Short-Run Average Cost and Average Cost Curves Per unit costs are used extensively for price and output analysis, more so than total cost. They provide the sane kind of information as total cost relations, but in a different, and frequently mOre usable form. The family of unit cost curves that can be computed include the average fixed cost, the average variable cost, the average total cost, and the marginal cost. However, only average total cost and average cost curves are discussed in this section as they include Anaconda ccc.av cacao» H.354 ccc . com com com com coo cco cmo cco co: co: com ccm com o no a a a m \+ r At once pqoonom mm was nacho poooaom mm .IIIIq..III. quoc pqccacm co cam nacho sqcomom co llllll duoo anooaom mm was madam psoonom mm NHx H>H .uoanmp omen» qa doqaquoo mood puoo Hugo» on» means an mpgsam Hocos henna on» now comoaoboc on fiasco cabana usaasam .ma and .ma .ma moans» ma comaspnoo spud pace Hope» 509% comoaoboc oobhfio omega . 0/ 0., .aooa .qsmaaoaz .ssaocmac 920m mom amsunm com .aqusacaoc unease» pecan mnapmhomo nonmboafi manna Hove: w you pnoo Hasqqd Hapoalt.n ohfiMah l l J L l .1 L w c ccc.mm f ccc.mm a ccc.em ' cccmom ..ccc.om . ccc.mm a ccc.mm T.ccc.cm chc.co rccc.ao jccc.mmo (szsttoq) qsoo tenuuv {840m Awaonmdm 000.av ossaob amused comm ccmm coem ccmm comm ccmm coem ccmm coma ccma coca ccma com com coo _ _ _ . 9. a. ; :+,:‘-a .-:l:.::t+..s. T :.T,--:!Tiea!+iil;l.,i 1+iIler qaoo unconom mm was gamma pnoonom mm .IIII..!III + 000. 0m 8"00 pnoopom on use macaw adoonom 0m IIIII .I H aaoo unmouom mm dam gamma pnoonom mm +.000 mm M1IIIIIIIIIII. Hz 02H>Hmomm a 000.00 .moanmp omen» ma % 000 no conameoo spec pmoo aspOp on» moans an madman accos nonpo on» 1 .05 mom domoao>od on dance mobndo A 000 asaaaam .ma one .ma .oa usages ma cooampooo spec pmoo aspen L.000.mn Scam domoaoboc mosaso omega m . mw - an x\»a\ 4.ccc.cm \\\\x \ ‘\ .\ . ‘\\\\ mac Jrccc.om .0 s .e 02%. as? -.000.0m be 0 . ,mv.o xm%« Lwccc.omo .aoma .asmaaoaz .msaccmcc “pom mom amamsm ccoa .uqoasacnoc unease» noun: wnapmuomo Headboafi gamma Hocoz s new awoo Hooded ampoaiu.¢ shaman (aléttoa) 4800 Iennuv Iszom -101- both fixed and variable cost and give some indication of mmhdcwm” Average costs per bushel are shown in tables 19, 20, and 21 fer the model plants included in this study. These per bushel cost were obtained by dividing the annual total cost from tables 16, 17, and 18 by the annual volumes from tables 7, 8, and 9. The primary use of per unit or average cost is for the construction of short-run average cost curves from which economies or diseconomies of scale can be determined. The short-run average cost curve is usually thought to be a U- shaped curve. Its U-shape depends upon the efficiency with which both fixed and variable resources are used. The short-run average cost curves for the model plants receiving average load sizes of 150 bushels, a receiving mix of 50% grain and 50% corn, and different annual hours of operb ation are shown in figure 5. . The cost of handling a bushel of grain reflects the rela- tionship between volume handled and the total of all fixed and variable expenses. Unit handling costs tend to decrease with increases in handling volume. Thus, the downward sloping 30 The average total cost curve is the vertical summation of the average fixed cost curve and the average variable cost curve. The Marginal Cost curve bears a unique relation- ship to the average cost curve which is derived from the same total cost curve. ‘When AC is decreasing as output increases, MO is less than AC. When AC is increasing as output increases, MC is greater than AC. It follows that at the output at which AC is a minimum, MC is equal to AC. Adoooapdoov uo>aooom emam do cg owns 03. use acapwuomo mo masom massed upamam oaaaucaason cpqsam meaa:camqam O. O. O. O. O. O. cucumboam macaw Hocoz oquIoHQSOQ use eamnam mo hpa0de0 om.m mc.m co.m aa.m :a.m mo.m ma.o m macsmsm omm om.m ms.m om.m . om.m mm.m mm.m am.o m macamsm coa amo mos mo; 2.: mo mmo omo mamas om m “macaw coo so.m cm.m co.m ma.o mm.e mm.e ma.m m macamsm omm mos mm; on: m: ooo amo omm Sagas ooa oo.o mm.o mm.o cm.o oo.m ca.m oa.m m cacamsm om m "macaw coo so ome mom mo.m 8m mos mo.ma 383m omm mm.m mm.m m:.m mm.m mo.m 3:.m m:.ma W camamsm cma m. co.aa moca ma.ca omm mm.ma omma ems: magnum om . u "mmsom 00m Amoqccv Ampaocv acoqccv nosqocv Amsaccv romanccv . mcsaocv m .m.m.m ccoa m .m.m.m comm m .m.m.m cccm W .m.m.m comm .m.m.m comm m .m.m.m ccoa m .m.m.m com m H .amma .demnoaz .oEas on» no pqooaom mm once one osaa on» mo unmouom mm gamma wombaooom use nooauadnoo escahm> Hedda moapsnomo macpsboam manna Home: Ham Hosmom Hem pmoo ewmaohaooem was maoauacdoo mdoanmb Recap moapmaomo cucumboam macaw Home: Mom Honmsm Hem pmco omsnobdlt.ma canes Acosmapnoov whose>oam nacho accoz onaancaacon can camaam mo mpaoacsc and soapsaomo mo whoom defined am.m ao.m mm.m ao.m mo.m mc.o am.o W mamamsm omm cm.m mm.m mm.m mm.m so; cm.m mc.o eases coa om.o ma.o cm.m om; cmo oo.o mm.o 233m om m "mascm coo mc.o em.e mc.o mm.m om.e mo.o ma.m m macamsm omm mc.o mm.m cm.m mc.o co.o om.o ma.m m macamsm coa mm.m ao.0 ma.m mmpo am.m mm.m cm.m m cacgmsm om W "masom cco ma.m mo.m mm.m oo.c ao.m mc.oa om.ea m mamamsm omm mm.m ao.m cm.m mc.o mm.m co.ca mm.oa m macamsm coa mw co.aa mm.aa mm.ca mm.ca om.ma cm.ma cm.ma m camsmsm om an m “mubom 00m Ampaoov . nopnoov . 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Ampqoov m .m.m.m ccoa m .m.m.m comm m .m.m.m cccm m .m.m.m comm m .m.m.m comm m .m.m.m ccoa m .m.m.m com m a u u M u u 1w. dobaooom omam mpgsam csaanoapson H upscam anaauoamaao H ccoa owcmmsa \M a .aooa .qamaaoaz .oaaa can go somehow co choc one oaaa one no somehow co nasmc wqapaoocm dds enoaaacsoo esoaas> nouns wsapmuomo encumboaa gamma Howe: you Hoflmsm pom pmoo owsuohfiooom oufim udon owwnobd dad noapdnomo no nLSbm Hassq¢ .cosafipcocunacma .qamflgofiz .oafia an» no pacouom cm quoc_cqa mafia on» no uncouom cm nfiauc end unoapadnoo ufioand> noon: wnapwuomo unapdpmfla nacac Hades pom Honmdm hem uuoo owdnok4tl.om manna mafibawoom Acmdmfipnoov ~106- muopmboam nacho Hove: unannoanpon and oawqwm no hpdoagmo and nowewnomo ho madam HQ#HQ< cm.m cc.m cm.m mc.: cc.: mc.c mc.o W mamgmsm mmw mc.: NN.: mc.c cm.c m:.: Hm.c ma.m m mflmswsm cmH cm.m cm.m mm.m cm.m cm.m mm.m is 333m 2. m 3 03 mm.: aw.: mc.m cm.m ma.m ma.m cm.m m camgmsm mmm mc.m cm.m mm.m Hm.m cc.c mc.o mm.m m mfimgmsm cmH mm.m Hm.w mm.w mm.m mo.c :H.m mo.cH m mdmgmsm mm mc.o ac.c :a.m Hc.cH cc.c mm.HH ma.mH m maosmsm mNN Hm.m cm.m mm.m cc.cH cc.cH cc.NH cm.ca m maosmsm cmH oc.HH m.HH mm.HH mc.HH cm.ma cm.cH mm.ma H mamgmsm mm H ”mnsom oom wmunwov a ”mpqoov . 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Ampnoov . wupnmov J Ampdoov u .m.m.m com: m.m.m.m cmcn m .m.m.m cccm m .m.m.m cmmm m .m.m.m cmmm m .m.m.m coma m .m.m.m can M . u a H u u I“ debfiooom ouam acquam cqfiquoacson M upqcflm oqdqnoawqfim H ccoa mwcnohq d .Hmca .qawfigoflz .oaaa map mo pnmonom mm nuoc cam mafia on» no pqoonom mm nacho wnfipficomm dad chfipadqoo nsoaad> Medan wnfipwnomo uuouwboafi macaw Howe: hem Hmnufim mom amoo cwwnoh< and qoapmuomo mo manom Hast< cm.m cm.m mm.m ma.m cm.m Hm.m Hc.: “ mammmsm mNN mc.m ma.m ma.m mm.m mm.m mm.m No.3 " mamsmsm cmH mH.: cm.: :c.: No.3 mm.: 55.: H:.m “ mfionwcm mm “ "musom coma cm.m ma.m mm.m H:.m mm.m Hm.m cm.m “ maonmsm mmm mm.m cc.m mm.m mm.m mm.m cm.m cm.m “ maacmsm cmH Lw um.c cc.c cc.c cm.: mm.m HH.m cm.m “ maogmcm mu m . u . u sham chH Ampnmov Ampnwov Ampaoov Ampnmov Ampcwov “mucoov Ampacov u . .m.m.m com: u .m.m.m cmcm ” .m.m.m cccm ”.m.m.m cmmm .m.m.m cmmm ” .m.m.m ccmH “ .m.m.m omm " .dodqfipnoollawma .qufiAOdz .oaHa on» Mo unoonom mm when can mafia as» we unconom mm dawns cad mdoapdcqoo msodawb pecan mdfipwummo whoem>wam awmua Hocoz mom Hosmsm pom pmoo cwmno>¢ll.am oanaa wqfibfimomm Amaonmfim 000.3 wfisaop agncaa 00mm 000m 000m 000m 03w 00mm 000m 000a 003 03a 00NH 000a 000 000 03 com _ 0 _ . . .+--.. a i . ._ _ .. .. 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However, figire 5 also shows that as the capacity of elevators was increased that unit handling costs for any given volume also increased. This is evidenced by the fact that the short-run average cost curve for the higher capacity plants is higher in each case than.the lower capacity plants. This is due to the higher valued durable assets and fixed cost associated with their ownership. _ Economy of operation.is definitely related to capacity utilization. Annual volume reflects an increase in annual hours of-operation, since annual volume is a direct function ‘ef hours of operation and hourly receiving capacity. Thus, as annual volume or annual hours of operation increase the! plants annual capacity is more nearly utilized and average costs per bushel decrease. vThe average cost curves for receiving 75 bushel loads did not show as great a volume range as do the plants when they are receiving 150 or 225 bushel loads. This is due to the volume limitations created.by the time required to posi- tion and receive 75 bushel loads. This condition was especial- ly noticeable flor the double-line plants. The initial point on each of‘the above average cost curves represents the point at which the various model plants are operating 300 hours per year. The end points are fer 1500 hours of operation per year. It will be noted that the - average cost between plants is much flatter for 1500 hours -110- than when operating only 300 hours. This shows that as the plants operate more hours per year that differences in unit costs between plants decrease. A multiple regression equation was used to determine the net relationship between the above factors (plant size, annual hours of operation, receiving mix, and average load size re- ceived) and total cost. The equation used, which conforms very closely with the observed total cost output relation- ships, is as follows: TC ' A + B111 + 3212 + 3313 + Bk!“ where TC is the total annual cost, 11 is the scale of plant or plant size, 12 is the average load size received, 13 is the total annual volume of small grain received, and 1h is the total annual volume of corn received. A separate regression was made for the single and double- line plants. The resulting statistics for each are shown in table 22. It should be noted that the partial regression coefficient fer the average load size was negative in both cases. This in- dicates that as the average load size received increases that total annual cost will decrease. This was expected because the smaller loads not only required.more man hours and electric power per hour of operation but total annual volume is also limited in many cases where small loads were being received. Higher total cost for the smaller loads can also be observed in figures h and 5. In both cases the total annual cost fer -111- Table 22.--Regreesion Coefficients and Associated Statistics for Medal Single and Double-Line Grain Elevators, Michigan, 1961.a Type of Statistic Singifizgine Dogbizzgine Value of a +21329.1649 +28155.hl86 Values of b-Partial Regression Coefficients: Plant Size (11) +3.7073 +5.3003 Average Load Size (12) -27.t155 -70.2899 Total Volume Grain (13) I +.012o +.013o Total Volume Corn (1‘) +.0180 +.Ol87 Standard Errors of Regression Coefficients: Plant Size (x1) +.2967 +.299o Average Load Size (12) +2.6526 +h.0395 Total Volume Grain (X3) +.0006 +.000h Total Volume Corn (1‘) +.0009 +.OOO6 R,.Multiple Correlation Coefficient +.9685 ' +.97h0 Hz, Coefficient of Determination +.936l +.9l.75 a Statistics are expressedin dollars. receiving 75 bushel loads is higher than for receiving 150 and 225 bushel loads. Total cost was positively correlated with plant size, total volume of grain and total volunn of corn 0 -112- Long-Run Average Cost Curves and Econonies of Scale in Model Plants In the long-run the firm can change the quantities of land, buildings, machinery, management, and all other re- sources because all resources are variable. The long-run can be thought of as a series of alternative short-run situations into any one of which the firm can move. The long-run average cost curve then shows the least possible cost per unit of pro- ducing various outputs when the firm has time to build any desired scale of plant. The long-run average cost curve is constructed by holding all factors constant, except the size of plant. By using the data contained in figure 5 a family of long-run average cost curves can be constructed for the model plants developed in this study, figure 6. The family of short-run average cost curves of figure 5 are constructed by holding all factors constant, except hours of operation. Whereas, the family of long-run average cost curves of figure 6 are constructed by holding all factors constant, except plant size. Each point on the curves in figure 6 correSpond to a similar point on the short-run average cost curves of figure 5.31 These long- rmn average cost curves are therefbre composed of segments or points of the various short-run average cost curves representing 31 The initial point on each of the long-run average cost curves of figure 6 correspond with the points making up the 750 bushel per hour short-run average cost curve of figure 5. The end point on each of these long-run average cost curves corresponds with the 4500 bushel per hour short-run curve of figure 5. -113- Amaanmsm coc.av mecao> assaaa ocNm coom cooN co N cocN chN cooN ccoa oo a oosa ooNa ccoa com com cos coN Jr- 1T} ..l..l _ Ti- TIE- 4-1L . 2-1+ ii i + + ..--+. manom ooma mumpsnomo Mom obhso camom pmoo 1“}. a [lilo 'alll. .IOI a madom 00Na wdaasaomo mom obndo camom pmoo: .:::! manom 000 weapmnomo pom o>aso oasom awoo ./ / .am one .cN.oa usages ea occaeeqco spec pmoo amassed on» mdams mp msoapmspam msapmsomo amnpo you domoao>oc on cameo me>aso nsHaSam .om maps» ma dosaspsoo sumo pmoo awakens one m oaswam Scam comoaoboc mo>hdo omens umpoz masom 00m mdapmammo pom measo mamom pmoo .Hmma .dmmanoaz .suoo pseouom on can samn0 pnooamm +00.HH +co.ma aoo.Na l .00.0H .oo.HN J on Me Kaz meabaooem 4 was .m chSmdm oma Mo ouam ccoa amassed as wqa>aeoem .nmo» mom unsom amounmb mdapmaemo anousboam gamma Hocoz mom moshdo pmoo omsaobd nsmlwsoq oamom pmoo mo maasmh «Il.m onsmah +00.mH. (squeo) qusng leg qsog ageaemv ~11h- the different scales of plant which the firm conceivably could build. The primary purpose of long-run average cost curves is for showing economies or diseconomies of scale. That the height of the long-run average cost curve decreases as annual volume increases means that as the scale of plant increases the short-run average cost curve lies at successively lower levels as well as farther to the right. This phenomenon is called economies of scale. The long-run average cost curves of figure 6 show that economies of scale in plant costs exist throughout the range of volumes included in this study. 6 The configuration of these cost-scale curves, however, is of note. Economies of scale are much more evident and greater for plants operating 300 hoursxper year than for those operating 1500 hours per year. This is evidenced by the down- 'ward sloping long-run average cost curve fbr plants operating 300 hours as opposed to the rather flat long-run average cost curve for those operating 1500 hours. Each set of curves tends to become flatter as the number of hours of operation is in- creased. The logic that develops from this is that if plants are used at capacity during a high proportion of their annual operating time scale economies are significant. 0n the other hand if plants are utilized below capacity or at a normal rate for a large proportion of the annual operating time, scale economies though still existing are negligible. -115- Annual hours of operation and plant capacity utilization therefore have a profound influence on economies of scale in the operation of grain elevators. The harvest season, assumed to be 100 hours, accounts for a larger share of the annual hours of operation for the smaller hours of operation than for the larger hours of operation. Thus, if elevator management de- sires economies of operation during the harvest season it would pay to construct a larger plant to take advantage of the economies of scale that are present. If management is concerned with economies of scale in the plants entire oper- ation then it would not pay to construct the largest possible plant because of the very small economies of scale present in these operations. Such economics as are available would be much more quickly offset by increasing tranSportation costs to deliver grain to the plant. Fron.an operating standpoint rather large economies of scale do exist between different sized plants for short periods of operation. Harvest season operating conditions are a case in point. However, looked at from an annual operating stand- point rather small economies of scale do exist between plants. How full utilization of plant capacity by adding complementary sidelines influences the operating implications of these scale relations cannot be developed here. However it suggests that sideline activities would tend to reduce the importance of scale economies derived from harvest season handling and im- prove the competitive position of small firms. CHAPTER VI SUMMARY AND CONCLUSIONS In this study an economic engineering approach was used to determine the relative operating economies of different sized grain elevators in the receiving and assembling of grain for shipment to other elevators, terminal storage or processing plants. The primary objectives were to develop some economic benchmarks to aid in the formulation of operating policies and to develop some tools to be used in planning for the most effi- .cient use of resources in the.future. The secondary objective was to develop some guides which would help management in making future economic adjustments, especially in the construction of new elevators. It was hoped that the guides developed in this study would prove useful to management and.the people who for- mulate the operating policies of grain elevators, eSpecially those concerned with proposed reorganization and expansion programs. Seven model plants were developed, ranging in size from 750 to #500 bushels per hour. These hypothetical plants were developed in detail and all costs were estimated as accurately as possible. Different operating situations were developed and all operating costs were estimated as influenced by these operating conditions. Each plant was equipped with similar machinery and equip- ment, the principal difference being in size and number depend- ing on whether it was a single or double-line plant. Consistency -ll6- -117... in method was maintained in estimating operating cost and annual volume for each plant. Decreasing per unit cost is not a function only of plant size, rather it is a function of many factors, some of which management cannot control or alter. Factors affecting plant utilization are more important in determining economies of operation than plant size. Average load size received, re- ceiving mix, and hours of operation are important as well as the actual receiving capacity of the different model plants. Average load size received and receiving mix depend on the type of farming carried on in.the area and are beyond the con- trol_of management. Management can influence, to some extent, the actual hours of operation by the size of plant selected and operating decisions regarding sideline activities. Plants with low capacity utilization, 300 hours of oper- ation, had the greatest economies of scale. The per unit cost at these production levels, however, was considerably higher than for plants with a higher degree of plant utilization. This was due to high per unit fixed cost at these levels of production. Plants with a high degree of plant utilization, 1500. hours of operation, showed some economies of scale between the smaller sized plants but very little between the larger sized plants. Plant operating efficiency as indicated by capacity utilization was therefore more important in determining the observed economies than plant scale or size. Plant capacity ~118- utilization is primarily a function of annual hours of oper- ation, receiving mix and average load size received. The higher the annual hours of operation the better the plants capacities are utilized. However, the seasonal nature of agricultural production prevents elevators from actually receiving grain many hours per year. Volume handled in a given period is more important because a large portion of annual volume is usually received during a relatively short harvest season. Management interested in only harvest season economy should therefore build a larger plant to take advantage of the economies of scale that are present when operating during this period. However, if the firm is more interested in.annual oper- ating economy than they should consider a somewhat smaller scale of plant depending on the annual hours of operation. They should choose that size of plant which will allow them to operate as economically as possible in a given area including plant as well as transportation costs. The average load size received has an influence on annual volume and cost. This is due to the fact that it requires a certain amount of time to position and unload a vehicle regard- less of the plants receiving capacity. There is also a delay 'between each load received. Annual volume and plant utiliza- tion is therefore reduced when small loads are received. Aver- age load size as a cost factor is particularly important during the harvest season. Each model plant showed downward sloping average cost -119- curves for each average load size received. Scale economies do not exist between model plants when receiving an average load size of 75 bushels. However they do exist between the various plants when receiving 225 bushel average loads. This occurs because as larger loads are received hourly receiving capacities are not reduced and less time is devoted to oper- ating delays. This results in better plant utilization and lower cost operations. The affect of receiving mix on plant capacity utilization is due to the fact that the receiving capacity for corn is reduced to 50 percent of the plants rated receiving capacity. Therefore, the higher the proportion of grain received the higher the annual volume and thus the lower are unit operating costs for a given number of hours of.operation or a given volume. The conclusion drawn from this discussion is flhat man- agers confronted with seasonal production may not build a least cost scale of plant for the grain merchandising operation. A smaller cost plant may be more desirable if it allows ade- quate flexibility in handling the various volumes of the different commodities and at the same time minimizes average ‘ unit costs on an annual basis. Elevator management should provide a facility which can handle expected volume increases and then plan to use the facility as near capacity as possible. Successful planning of future elevator construction and the reorganization of present operations depends on the deter- mination of future as well as present needs. Physical as well ~120- as economic adjustments will be required if elevators are to keep up with rapidly changing conditions. ,Management consid- ering reorganization should take these changes into consider- ation before large investments are made in facilities that may prove obsolete or uneconomical long before their useful life has expired. The results of this study indicate that firm adjustments should not be based on plant size alone. Since a small plant can receive grain at about the same per unit cost as larger plants attempts should be made to fully utilize existing capacity before considering larger plants. One such adjust- ment is to build new grain merchandising facilities to corres- pond with existing environmental and plant conditions or built with the expectation of adjusting the rest of the plants oper- ations around this operation. Plant flexibility is required in planning multi-purpose grain merchandising operations. This is eSpecially true if the grain merchandising facilities are to be fully utilized by adding or adjusting plant activities around this operation. Grain merchandising facilities should be flexible enough to be able to receive all the various crops produced.within an area, the different volumes of each commodity received from year to year, the different load sizes received, and the different proportions of each commodity received from year to year. Flexibility can be obtained by using dual purpose machin- ery and equipment, by building receiving facilities that can -121- handle large as well as small loads, by having several small storage bins rather than large bins, and by having double-line rather than single-line plants. Based on scale relationships alone, the number of plants now operating in the Michigan elevator industry should not be expected to decrease greatly. The analysis shows that with operations, based on 600 to 900 hours per year actual scale economies are not great. The small economies of scale ob- served would not offset the added transportation cost of fewer but larger plants. However, reorganization and adjust- ments might be made in plant receiving rates so that harvest volumes can be received faster. Further study is needed to determine the feasibility and affect of adjustments made to increase plant capacity utili- zation. This problem is closely related to agricultural pro- duction and environmental conditions within an area and might be considered as part of a location study. However, a more appropriate approach would be to study the cost scale relations of other elevator activities and their affect on plant capacity utilization. This could be done by using the model plants developed in this study and then adding other activities such as, drying, permanent storage, feed mixing and grinding, grain banks, and other sideline activities. In-plant complementary and competitive relationships could be observed and studied as they affect the overall operation and capacity utilization. In this way the entire firm.could be evaluated in terms of cost scale relations and adjustments could be recommended accordingly. ~122- Another area closely related to plant location which needs further investigation is the area of transPortation and its affect on elevator operations and cost. This is especially important to multi-plant firms what are concerned with combining two or more plants into a single operation. The results of this study tend to indicate that several small plants would be just as efficient as one larger plant. How- ever, this study was based on the grain merchandising oper- ation only and further investigation is needed to determine the transportation advantages or disadvantages associated with larger plants. APPENDIX A. DURABLE ASSET INVESTMENT ESTIMATES APPENDIX A DURABLE ASSET INVESTMENT ESTIMATES The fixed assets needed are: land and land improvements, buildings (commonly called the plants work area), storage facilities, machinery and equipment, cob burner, railroad siding, trucking I equipment, office building and office furnishings. Different techniques were employed in.making each of these estimates and are therefore discussed separately. ear the purpose of this study land was valued at $1,250.00 per acre. It was assumed that this would also cover the cost of any land improvements. This figure was arrived at by studying _ the value at which land and land.improvements were carried on the books of elevators actually operating in.Michigan. This figure will not apply to all areas of the state but is included as re- presentative. Table 23 shows the land provided for each of the various model plants and the total investment-in land and land improvements. -125... Table 23:--Estimated Investment in Land and land Improvements for Model Grain Elevators, Michigan, 1961. Acres Pro- Estimated Estimated Plant Capacity vided Per Cost Per ' Total Investment Plant , Acre ' Per Plant . W) fierce) (dollarsT Tdm 750 B.P.H. - Single-Line ‘ 2 ‘ 31250 32500 1500 3.153. - Single-Line 2% .1250 5125 2250 B.P.H. - Single-Line 3 1250 3750 2250 B.P.H. - Double-Line 5 1250 ~ 3750 5000 B.P.H. - Double-Line 5;- 1250 4375 3750 B.P.H. - Double-Line 4 1250 5000 45003.23. - Double-Line 4; 1250 5625 myth ,,-_".=-22:_- - = 0.1;: '-, ..'_-.1 ' as The plant designs used in this study were obtained from eleva- tor designers and builders now Operating in Michigan. They re- present the most common type of facility being built in Michigan during 1961. . I . The actual building cost estimates were made by estimating the above ground cubic foot capacity of the different model plants. The drive area'was then calculated at 45 cents per cubic foot and the work area was calculated at 55 cents per cubic foot. These per cubic foot cost estimates were derived from cost data of buildings actually constructed in Michigan during 1960, and from engineering- ~126- estimates. Table 24 shows the estimated building cost for the various model plants. These estimates include only the cost of the steel frame buildings with concrete foundations and basement. The cost or all machinery, equipment and equipment installation are figured separately. Each.model plants building requirements and cost were estbmated individually. Table 24:-- Estimated Investment in.Buildings for'Model Grain Elevators, Michigan, 19610 —_vv~ fi—W— fi—v Estimated Cost of Building Plant Capacity ‘ Construction A m) “ (dollars) 750 B.P.H. - Single-Line 312,650 1500 B.P.H. - Single-Line . 14,600 2250 B.P.H. - SingleéLine 16,450 2250 B.P.H. - Double-Line 29,000 3000 B.P.H. - Eouble-Line _ 30,000 3750 B.P.H. - Double-Line 34.300 4500 B.P.H. - Double-Line 35.800 For the purpose of this study each plant was equipped with 'what appears to be adequate storage Space for the assembling process -127- thet they perform. The range in storage capacity was 20,000 bushels ,ror the 750 bushel per hour plant to 120,000 bushels forthe 4500 bushel per hour plant. Storage capacity was increased between.model plants in 20,000 bushel increments. Stave silos with.hoppered bot- toms are used. These silos are very common in.Michigan and are available in a variety of sizes and capacities. Each.model plant is equipped with at least 6 silos, the larger ~plants having more than six. The number or silos is increased to obtain the desired storage capacity rather than increasing the silo sizes. Table 25 shows the number of silos provided for each.model plant, total storage capacity and the estimated investment.made in.each case. , The actual cost estimates for the various sized silos, with hoppered bottoms, were based on data obtained from construction companies. The foundations, root and head house costs were then. estimated by using cost data frmm buildings actually constructed in.H1chigan during 1960. The total cost shown below includes the silo with hoppered bottoms, foundation, roof, and head house. The head house provided will house the shipping scales, elevator legs, overhead screw conveyor and necessary spouting. -128-- Table 25:-- Estimated Investment in Storage Facilities for Model . Grain Elevators, ' Michigan, 1961. '— —__w' _ number Capacity Approximate Estimated of. Per 'Total Investment Plant Capacity ‘ Bins ‘ Bin ‘ Storage In Storage » . . Capacity Facilities (B.P.fi.)’ (Bu.) (Ii.) gdollarsi 750 B.P.H. -.. Single-Line 6 3.333 20,000 25,200 1500 B.P.H. - Single-Line 6 6,666 40,000 57,200 2250 E.P.H. - Single-Line 6 10,000 60,000 46,750 2250 3,2,3. - Double-Line 6 10,000 60,000 46,750 3000 B.P.H. - Eouble-Iine 8 10,000 80,000 61,950 3750 E.P.H. - bouble-Line 10 10,000 100,000 77,450 4500 B.P.H. - Eouble-Line 12 10,000 120,000 92,950 —‘ v—— The storage bins provided for the model plants are not the most economical from the standpoint of investment per bushel. The same 1 amount of storage could be provided at less total cost by having “ ~fewer but larger silos. This is due to the fact that the per bushel 3cost for storage silos decreases as the size of the silo (diameter) increases. It would therefore be cheaper to use the largest pos- sible silos and use as few as possible. However, from a flexible standpoint this is not desirable because it would be possible to have an entire silo tied up with only a small quantity of material. The purpose of the silos provided for each.mcdel plant are for ease of operation and are to provide an adequate number of bins so that the plants could operate in as efficient a manner as is possible. Each plant is equipped with the same machinery and equipment, The only difference being in size and number. The machinery and ‘ equipment requirements for the model plants were obtained through actual observations and from equipment specifications for plants actually constructed during 1960. Tables 26 through 30 contain a detailed list of the equipment provided for each operating phase of the 2250 bushel per hour double-line model plant and the estimated cost of each piece of equipment. Table 31 shows the miscellaneous equipment provided for each of the model plants. V ' Table 26:-- Equipment List and Estimated Equipment Investment for The Receiving Phase of a.Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961. Item ‘ Quans Capacity List Total tity Price Cost . a b Truck Hoist 2 Cradle Capacity~ 4 ton 32609 $2843 Shaker Dump Pit' 2 500 BuShels ' .5424 .3666 j ItBflized Tatal 00. 000 0.0 ‘ 509 Installation 0 e e e e e e o o t 2413 ' Total Installed » ' . coat .0. 0.. 00. 922 a Where applicable the list price includes motor, starter, push button, speed reducer, spouting and any other necessary acces- series. b, Total cost includes 4% Michigan sales tax and freight f.o.b. the factory to Lansing, Michigan. -13 O.- The actual cost estimates included in the above tables were obtained from machinery manufactures catalogs and from elevator equipment installation contractors. The various. pieces of equip- ment for which costs were estimated are those which are most commonly found within the state. I The estimated machinery costs include the manufactures list price, plus accessories, plus 4% Michigan sales tax, plus freight from the factory to Lansing, Michigan , and plus a 40% (of list price) installation charge. Discounts were allowed where applicable, but were not knownlin .all- cases. -131- » Table 27:--Equipment List and Estimated Equipment Investment for The Cleaning Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, 2 fl, ‘7 w i... Item Quan- Capacity List Total tity Price Cost a b Ear Corn Crusher 2 800 B.P.H.-Shelled corn 31642 81754 Intake Leg 2 1260 B.PIH. ' .4376 .4695 Two Way Valve 2 ‘ 8-inch outlet 80 86 Garner Bin 2 100 Bushels 360 394 Corn Sheller and Corn ' ' Cob Blower 2 900-1100 B.P.H. 7975 8521 Garner Bin 2 100 Bushels .360 :94 Grain Cleaner c 2 1500 B.P.H. 6004 6595 Screenings Screw ' I Conveyor“1 2 ‘oéinch.8crow Conveyor 1699 1816 Dust Collectore 2 Companion to Cleaner 4885 5241 Scales Hopper 2 Companion to Scales 215 231 Spouting ... 8-inch Spouting 440‘ 472 Itemized Total ... ... ... 3§§§7§- Installation ... ... ‘ ... 11,214 Total Installed 06st W33- Where applicable the list price includes motor, starter, push button, speed reducer, spouting and any other necessary accessories. Total cost includes 4% Michigan sales tax and freight f.o.b. the factory to Lansing, Michigan. . st price includes 4 sets of extra screens for each cleaner. List price includes sacking spout and valve for each conveyor. List price includes a dust bin with a capacity of one truck load for each dust collector. (59-0 0' 9 -132— Table 28:— Equipment List and Estimated Equipment Investment for The Weighing Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961. Itemv Quan- Capacity List Total tity Price ~Cost a b Auto-Matio Receiving ' Scales‘ ‘ 2 . 6 Bushel Dump 18003.P.H. 34020 84438 v7. Scales Hopper 2 Companion to Scales . . 215 .231 Testing Equipmentc 2 "... , 1411 1557 Spouting ... 8-inch Spouting 361 387 “Itemized Total ’ ... ... ... #6553— Installation *' ... ... ... '1866 ' Total Installed Cost ... ... ... $3535 5 fihere applicable the list price iniiudes motor, starter, puah button, speed reducer, spouting and any other necessary acces- series. b Total cost includes 4% Michigan sales tax and freight f.o.b. 'the factory to Lansing, Michigan. ° List price includes moisture tester, weight per bushel tester, work bench and other necessary accessories. _Therefore, the above prices for some pieces of equipment may be over. Statede . _ JMichigan sales tax was included for all items estimated. Howe ever, certain items used in processing grain are tax exempt depend- ing on the particular situation and use involved. Since these exemptions depend on the individual situation it was included in all cases. 1" -133- Table 29:--Equipment List and Estimated Equipment Investment for The Storage Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 19610 Item Quan- Capacity List Total tity . ‘ Price Cost a b Main Leg 2 1260 B.P.H. $5408 #5802 Distributor ‘ 2 8-inch' ' 958 .1021 Head House Screw - Centeyor 1 T4—inch Screw Conveyor 1894 2027 Bin Slides and Shut , Offs . 6 ... _ 360 387 Spouting_ ... 8-inch Spouting 690 739 Itemized Total ... ... ... 997 Installation , ... . .3724 Total Installed Cost ... ... ... $13700 I Where applicable the list price includes motor, starter, push button, speed reducer, spouting and any other necessary acces- series. b Total cost includes 4% Michigan sales tax and freight f.o.b. the factory to Lansing, Michigan. “ in installation charge of 40% (of list price) was included for all machinery which requires installation. This figure was based on data obtained from elevators actually constructed in.Michigan during 1960 and from elevator equipment installation contractors. A figure of 40% may be high for some of the smaller items but it appears to be a fairly representative average installation charge for all items involved. -134- Table 30:--Equipment List and Estimated Equipment Investment for . The Load-Out Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Houerapacity, Michigan, 1961. Item Quan- Capacity List Total . - tity Price Cost a b Basement Screw Conveyor 1 14-inoh Screw Conveyor 01888 32020 Load-i-Out Leg 1 2850 3.2.3; 5575 .3832 Distributor 1 8-inch 135 144 Scales Hopper 1 Companion to Scales 108 116 Auto-Matic Shipping Scales 1 10 Bushel Dump,24OOB.P.H. 1645 1816 t Scales Hopper 1 Companion to Scales 108 116 Load-Out Spoutingc ... ... 689 737 ~ Itemized Total W Installation ... .3258 Total Installed Cost ... ... 3'1'2'6'5'9' a Where applicable théiiist price includes motor, starter, push —‘ ' button, speed reducer, spouting and any other necessary access 'Boriaae b Total cost includes 4% Michigan sales tax and freight f.o. b. the factory to Lansing, Michigan. List price includes flexible load-out spout for trucks and for railroad boxcars, necessary spouting and spout holder for load- ing railroad boxcars. Freight was calculated from the factory to Lansing, Michigan. Railroad freight rates of less than car load lots were used in all cases. Miscellaneous equipment was also estimated for each.model plant. The same procedure was used in.making these estimates as was used in -135- Table 31:--Miscellaneeus Equipment List and Estimated Equipment Investment for a Model Double-Line Grain Elevator, 2250 Bushel Per hour Capacity, Michigan, 1961. Item Quan- Capacity List Total tity Price Cost ‘ , ‘a‘ b Manliftc 1 1 man capacity 31244 $1830 Tools ... ... t t 229 246 Ladders 1 40'Extensicn 140 150 2 15* and 12' 138 41 1 10‘ Step Ladder. :15 16 Grain Scoops 4 ... 29 32 .Broems (House Type) 6 ... 15 16 Brooms (Push Type) 2 ... ' 7 7 Car Movers (Jacks) 2 ... 30 52 Rope - ' 100' 1-inch 2o 22 Car Puller Hooks 2 ... 16 18 Bag Trucks 1 .... ‘ 48 51 Portable Scales 1 1,000 pounds ' 81 87 ‘ Trouble Lights 2 ... > , 90 99 Electric Lanterns 2 Battery Type 15 16 Price Board 1 18" x 50" q, 16 17 Fire Extinguishers 5 Water or Anti-Freeze 204 ' 225 5 Dry Chemical Type 140 155 Itemized Total ... ... ... 135-5-6- 3 fifiere applicable the list price includes motor, starter, push button, speed reducer, spouting and any other necessary acces- series. b' Total cost includes 4% Michigan sales tax and freight f.o.b. the factory to Lansing, Michigan ° Total cost includes installation in addition to sales tax and 'freight. -136... making the estimates for all other’machinery and equipment. s t f c s The office buildings provided for the model plants used in this study are separate buildings-from the main elevator building. They range in size from 480 square feet to 720 square feet. The space required was obtained from elevators actually visited and from elevator designers and builders new operating in.Michigan. Each office has a private managerls office, two toilets, storage closet, an area for the clerical staff, adequate room for waiting on ous- . tomers and necessary space for displays. The office space provided for each plant is shown in table 52. It was assumed that an office _larger than 30' x 24"would not be required for the grain.merchan- dising operation. ' Office building cost were estimated at $16.00 per square feet. This includes the entire building, less furniture and office I equipment. The estimated investments in office buildings are for concrete block and brick structures. The $16.00 per square foot was derived from similar types of buildings constructed in Michigan during 1960. ' ~137- Table 52:--Estimated Investment in Office Buildings and Office Space Provided for Each Model Grain Elevator, Michigan, 1961 . Plant Capacity Office Size Square Estimated Feet Cost of Provided Office » , BRilding mi ' _ ' (dollars) .‘750 B.P.H.-Single-Line, 24' x 20' 480. ‘ $7650 1500 B.P.Hl-Single-Line 24' x 20'- .480 _ "7650 2250 B.P.H.-Single-Line 24' x 24' 576 9200 2250 B.P.H.-Double-Line 24' x 24' 576 9200 3000B.P.H.-Double-Line 50' x 24' 720 '11500 5750 B.P.H.-tDouble-Line 50' x 24' 720 11500 4500 B.P.H.-Bouble-Line 50' x 24' 720 11500 For the purpose of this study audits of existing plants were used as the primary source of information.in regards to required office equipment. Table 33 shows a detailed list of the office equipment provided for the 2250 bushel per hour double-line model plant and the estimated cost of each item of equipment provided. The office furniture and equipment estimates were made by 'using manufacturascatalogs and by consulting various agencies selling the desired items. The estimated costsinclude 4% Michigan sales tax, freight from the factory to Lansing, Michigan, and installation where applicable. A.miscellaneous category was also Table 33:4-Equipment List and Estimated Equipment Investment for Office Equipment for a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961. Item Quantity »List Price Total Cost3 Desk 2 8245 $268 Desk Chairs . ’3 .137 .150 Office Chairs, 6 192 211 File Cabinet 2 122 134 Storage Cabinet . 2' 140 153 ZManager's File and Safe 1 75 82 Office Machine Stand 1 49 54 ~Bookcase 1 35 38 ,Testing Equipment 1 set. 706b 768 Office Machines . 1000c 1095 Price Board 1 16 18 Hall Clock ‘1 14 15 Fire Extinguisher 1 30 33 Steve 1 350 504(1 Itemized Total ... ... 83523- Miscellaneeus ... ... ‘ 325° Total 55848" W cost 1m Michigan sales tax and freightfim the factory to Lansing, Michigan. b List price includes moisture tester, weight per bushel tester, work bench and other necessary accessories. ' ° List price includes an allowance for a calculator, typewriter, billing machines and check machine. a Eggeéheest includes installation in addition to sales tax and Allowance is to cover’miscellaneous items such as pencil sharp- eners, wastebaskets, diaplay counters, bulletin board, desk lamps and customer counter. -139- included for items such as wastebaskets, pencil sharpeners, desk lamps, bulletin boards and display counters. n a i Enough railroad siding was provided for each of the model plants so that they would not run out of storage space during the harvest season. Space was provided for the switch and for clearance between the switch and main track. The railroad siding provided should be more than adequate for'moving empty cars into leading position and for storing both empty and loaded boxcars. Table 34 shows the maximum number of railroad boxcars that can be spotted at each plant, the feet of track required and the total estimated cost of the railroad siding. An average boxcar size of 1800 bushels was assumed and an average length of 50 feet per car was used. The number of boxcars required per day, assuming that a switch is made every day, was determined by the plants maximum receiving capacityt -1to. Table 34:-- Estimated Investment in Railroad Siding for Model Grain Elevators, Michigan 1961 . ‘f Plant Capacity Number of Feet ' Estimated Railroad of - Investment Boxcars to Track ' in Railroad Be Spotted Provided Siding . ; ' Facilities "”7322: .7 I ' _ ' ‘ 750 B.P.H.sSingle-Line 4 boxcars 550 $8,100 1500 B.P.H.‘Single-Line 6 boxcars 550 9,300 2250 B.P.H.-Single-Line 8 boxcars 750 10,500 2250 B.P.H.-Double-Line 10 boxcars 950 12,900 5000 B.P.H.-Double-Line 12 boxcars 1150 14,100 37SOB.P.H.-Double-Line 14 boxcars 1550 ,15,500 4500 B.P.H.-Double-Line 16 baxcars 1550 16,500' The actual cost estimates were based on cost data obtained from a railroad Company now operating in Michigan. ‘The switch Iitself and enough track for car clearance, between the main track and the siding, cost about 84,500. The reaeining track will cost from 810,00 to 312,00 per foot, depending on the particular situa-_ tion.. For the purpose of this study the $4,500 base price plus 310 per foot for the remaining track was used. Eatim ted Ingestggnt in Trucking Equipment Trucking equipment provided for each model plant was simply ' one two-ton truck with grain box. The truck for each plant was estimated at $4,300. This estimatewas obtained by contacting 9-. ”a '. . . t . . . . . . I v a g A,. . t I w l V ‘ - v r ’v o e e o e I ' I e e O . -3 .C e I O . . . . I O O . . . j .c . \ O O O i a . 1 O O J ‘ I I e . , - . q - e e - . o - - . . ,. D .- 1 1 O i . ' e - b . 7 J O 0 V I i t . -141- several truck dealers. Espimateg IEIESIEeBE mm 093m 29b Bummgms Cob burners were provided for each plant according to the size of corn sheller. The cob burner used for all plants was estimated at $7,000 each and was based on data obtained from elevator con- tractors now operating in Michigan. This estimated price includes only the cob burner, all necessary spouting was included as part of the corn sheller or cob blower. The larger plants were equipped 'with two cob burners of equal size. APPENDIX B FIXED COST ESTIMATES '14p3-e APPENDIX B FIXED COST ESTIMATES The fixed cost category includes all those cests associated ‘with owning the physical assets and have no direct relation to the actual operation of the model plants. These annual fixed expenses are based entirely on total investment in the various durable assets and do not vary as operating conditions are varied. The following fixed expenses are included in this category: insurance on buildings and alleequipment; maintenance and repairs; personal property taxes; and interest on investment. Each of these costs were estimated on an annual basis and the techniques used were those that correspond ‘with existing Michigan conditions and practices. Each of the cost included in this category are discussed separately. eci t n ns Depreciation expense comprised the major fixed expense for the model plants. It was a function of total investment in the various fixed assets and the rate of depreciation. The estimated life and annual depreciation allowed for each piece of equipment pro- ‘vided for the various operating phases are presented in tables 35 through 41 for the 2250 bushel per hour double-line model plant. Table 42 shows the total annual depreciation expense allOwed for the 2250 bushel per hour double-line model plant. The total annual depreciation expense allowed for each plant corresponded very closely with the depreciation expense found in existing Michi- ganh elevators. No depreciation was estimated for dhnd and land -l44-- improvements. Table 35:-- Equipment List and Estimated Annual Depreciations for The Receiving Phase of.a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961. Item. . Quan- Total Estimated Annual tity Cost Life _ Depreciation (doIIErs)' (yearST‘ _ (doII:?§7-_- Truck Hoist 2 $2845 17 $167 Shaker Dump Pit 2 .5666 20 .183 Itemized Total ... $6559. ... 3335 Installation I ... .2413 ... .130 Total Installed Cost 0 O O §8922 O O O gZBO -145- Table 36:-- Equipment List and Estimated Annual Depreciation for The Cleaning Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961. Item Quan— Total Estimated Annual tity Cost Life Depreciation TdolIérsT”(§earsTw (ESIIEEET- Ear Corn Crusher 2 31754 ' 12 e145 Intake Leg. 2 .4695 20 .255 Two Way Valve 2 86 20 4 Garner Bin 2 394 20 20 Corn Sheller and Corn Cob Blower 2 8521 15 568 Garner Bin 2 394 20 20 Grain Cleaner 2 6395 18 355 Screenings Screw , Conveyor 2 1816 20 91 Dust Collector 2 '5241 20 262 Scales Hopper 2 231 20 12 Spouting ... 472 10 47 Itemized Total ... S59579' ... $7739 Installation ... .11214 ... ' 658- Total Installed Cost ... $47T93 ... $2 1 ' :1 -146- Table 37:--Equipment List and Estimated Annual Depreciation for The Weighing Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961. Item Quan- Total Estimated Annual tity Cost Life Depreciation ‘—fi 1‘7 (dollars7”cyearsy‘ (dollars) Auto-Matic Receiving 2 $4438 15 .' e296 Scales . , Scales Hopper 2 231 20 12 Testing Equipment 2 1537 10 154 Spouting ... 387 10 39 Itemized Total ... 36593 ... $557— Installation ... .1866 ... .129 Total Installed Cost ... S8459 ... 5330 -147- Table 38:--Equipment List and Estimated Annual Depreciation” for The Storage Phase of a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961. A Item Quan- Total Estimated Annual tity 00st Life Depreciation ‘ “(dollars7’(years) (dEIIars7 Main Leg 2 $5802 20 $290 .Distributor 2 ~1021 20 t 51 Head House Screw Conveyor 1 2027 20 101 Bin Slides and Shut ' ' Offs 6 387 25 15 Spouting ... 739 10 74 Itemized Total ... 997 ... 3531 Installation ... .3724 ... .199 Total Installed Cost ... $13700 ... S730 “lb-8- Table 39:--Equipment List and Estimated Annual Depreciation for The Load-Out Phase of a Model Ibuble-Ldne Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961. Item Quan- Total Estimated Annual tity Cost Life Depreciation _'—"‘ (dollars) (years) (dollars) Basement Screw Conveyor 1 $2020 20 3101 Load-cut Leg . 1 .3832 20 .192 Distributor 1 144 20 7 Scales Hopper 1 116 20 6 Auto-Matic Shipping Scales 1 1816 15 121 Scales Hopper 1 116 20 6 Load-Out Spouting ... 737 10 74 Itemized Total ... 38787' ... 5557 Installation ... .3258 ... .188 ' Total Installed Cost '... 3T§535 ... 7655 -149- Table 40:-- Miscellaneous Equipment List and Estimated Annual Depreciation for a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961. Item Quan- Total Estimated Annual tity Cost Life Depreciation (deIIars7’(years7 ‘Tdollars) Manlift 1 81830 20 892 Tools ... ' 246 10 '25 Ladders 4 201 10 21 Grain Scoops 4 32 6 5 Brooms 8 23 1 20 Car’Movers (Jacks) 2 32 10 3 Rope 1100‘ 22 6 4 Car Puller Hooks 2 ' 18 1o 2 Bag Trucks 1 51 10 5 Portable Scales 1 87 10 9 Trouble Lights 2 '99 ' 1o 10 Electric Lanters 2 16 5. 3 Price Board 1 ' 17 10 2 Fire Extinguishers 8 376 10 37 Itemized Total ... $3556 ... $258 -150- Table 41:--Equipment List and Estimated Annual Depreciation for Office Equipment for a Model Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961. Annual Item Quanp Total Estimated tity Cost Life Depreciation TdollarsI‘TyearsT ‘Tdollarsy Desk 2 3268 15 $18. ' Desk Chairs 3 ' 150 10 ' 15 Office Chairs 6 211 10 21 File Cabinet 2 134 15 9 Storage Cabinet 2 153 15 1O Manager's File and Safe 1 82 2O 4 Office Machine Stand 1 54 1O 5 Bookcase 1 38 2O 2 Testing Equipment 1 set '768 10 77 Office Machines . . . ' 1095 10 110 Price Board 1 18 1O 2 Wall Clock 1 15 1O 2 Fire Extinguisher 1 33 1O 3 Stove 1 504 10 50 Itemized Total ... $3523 3;; 3328 Miscellaneous .3. 4'325 ... - 33 Total All $3848 ... A $361 -151- Table 42:-- Estimated Investment In Durable Assets and Annual Depreciation For a Model-Double-Line Grain Elevator, 2250 Bushel Per Hour Capacity, Michigan, 1961. Durable Asset Total Annual3 Annual Estimated Depreciation Depreciation Investment Rate ...—n Land and Land Improvements $3.750 ... ... Buildings 29,000 2.5 Percent' 8 725 Storage Facilities 46,750 2.5 Percent .1,169 Machinery and Equipment 87,369 Straight Lineb 5,190 Corn Cob Burner 7,000 20 years 350 Railroad Siding 12,900 2.5 Percent 323 Trucking Equipment 4,300 6 years 717 Office Building 9,200 2.5 Percent 230 Office Equipment 3,848 Straight Line° 361 Total W $97535- a The depreciation rate used here is based mainly on physical factors such as type and quality of construction. Shorter useful lives than allowed above are often used for accounting 'purposes, in.making constuction loans and in business planning. No allowance is made here for obsolescence. Depreciation rates are based on.manager' 3 recommendations, observations of existing country grain elevators and reference to the follow- ing published.material; "Income Tax Depreciation and Obsoles- cence, Estimated Useful Lives and Depreciation Rates," .E, U.S. Treasury Department, 1942; E.H. Boeckh, "ngcgh's Manual ' of A risals," 5th edition, Cincinatti, Ohio, 1956, pages 711-27; and “Consolidated Catalogs," 7th edition, Chicago, Illinois, 1949. page 270. b Depreciation.was figured separately for each individual piece 23 equipment. For details see Equipment List, tables 35 through c Depreciation.was figured separately for each individual piece of equipment. For details see Office Equipment List, table 41. -152- nsu c ens Fixed insurance expenses included fire and extended coverage insurance on buildings, machinery and equipment, and on trucking equipment. All model plants had the same type of insurance coverage. The building and equipment insurance coverage included almost 100 percent protection from both fire and wind to the cost of the facilities provided for the model plants. The fixed truck insur~ ance expense covered liability, collision and comprehensive insur- ance for the one truck provided for each plant.. Inventory, liaa ' bility, and workmen's compensation insurance costs were included as part of the variable expenses because the risk involved changed as operating conditions were varied. The estimated annual fixed cost of insurance for the various model plants is shown in table 43. ,These insurance estimates were based on rates in effect in 1960. Pgrsgna; Prgpgrty Tax Egpgngg Personal property tax expenses vary widely within the state and there is no uniformity among counties in the property tax rates and assessment values. It was therefore, impossible to determine a uniform formula for establishing tax valuations. In order to obtain uniformity between plants it was assumed that all buildings and equipment were assessed at the same rate. The procedure followed in this study was to estimate personal property tax at 4 percent of the average undepreciated value over " the life of the fixed assets. The estimated annual personal proper- ty tax for the various model plants are shown in table 44. -153- Table 43:~- Estimated Fixed Insurance EXpense for Model Grain Elevators, Michigan, 1961. w— ‘— Plant Capacity Fire Windstorm .Truck Total (B.P.H.) 750 B.P.H.-Single-Line $194 $29 $118 $341 1500 B.P.H.-Single-Line .237 ‘35 .118 .390 2250 B.P.H.-Single-Line' 280 43 118 441 2250 B.P.H.-Double-Line 427 50- 118 595 3000 B.P.H.-Double-Line 530 65 118 773 3750 B.P.H.-Double-Line 587 71 118 776 627 76 118 821 4500 B.P.H.-Double-Line -l54- Table 44:--Estimated Personal Property Tax Expense for Model Grain Elevators, Michigan, 1961. Plant Capacity Total . Estimated Annual Investment Personal Property Tax """7iilfifiij"' " *Tdollarsy' (dollars?— 750 B.P.H. - Single-Line 3110,863’ 32,217 i 1500 B.P.H. - Singlestine 4138,178 '2,764 2250 B.P.H. - Single-Line 161,190 3,224 2250 B.P.H. - Double-Line 204,117 4,082 3000 B.P.H. - Double-Line 243,475 4,870 3750 B.P.H. - Double-Line 276,413 5,528 4500 B.P.H. - Double-Line 303.343 6,067 fivv—v‘ figpgixs and Mgintgnance Expense The procedure followed in this study was to estimate the total annual repair and maintenance expense for the model plants and then to allocate it between the fixed and variable expense categories. Certain expenses, such as painting or other care given the ex- terior of the plant are a result of weathering, rather than volume. They tend to occur every few years regardless of volume and the amount included here was intended as a yearly average for this kind of expense. Audits of existing plants were used as guides in determining the average annual repairs and maintenance paid by grain elevators. ~155- It was found that this expense amounted to about 2 percent of the total investment in fixed assets. Total annual repairs and main- tenance was therefore calculated at 2 percent of the total invest- ment in fixed assets. One-sixth of this figure was then allocated to the fixed eXpense category and the reamining prorated to variable expense according to hours of operation. Table 45 shows the total annual repairs and maintenance ex- pense for the various model plants and the amount allocated as a fixed expense. The repair and maintenance of such equipment as leg belts and buckets, car loading spouting, and spouting to and from bins are directly associated with volume. Repairs on electric motors and other moving equipment also tend to be closely associated with use 'and volume handled. Repairs of this type are included as a variable eXpense and are discussed in Appendix C. -156- Table 45:--Estimated Repairs and Maintenance Expense for Model Grain Elevators, Michigan, 1961. Plant Capacity Total Total Annual Maintenance As _ Investment Maintenance A Fixed Expense, In Durable at 2% of 1/6 of Total Assets Total Maintenance ‘ Investment (B.P.H.7 ‘Tdollarsj’ idollars) ‘TdéIiarsy 750 B.P.H. Single-Line $110,863. 82,217 2 $370 1500 B.P.H. SingleeLine '138,178 '2,764 '461 2250 B.P.H. Singleehine 161,190 3,224 537 ’ 2250 B.P.H. Double-Line 204,117 4,082 680 3000 B.P.H. Double-Line 243,475 4,870 812 3750 B.P.H. Double-Line 276,413 5,528 -921 303,343 6,067 1011 4500 B.P.H. IbubleéLine Intgrgst 9n Invgstmgnt Long-term capital generally consists of deferred liabilities and ownership Capital. Such capital is required regularly as con- trasted with season capital which is needed only during harvests. Interest on seasonal capital is subsequently discussed as a variable expense, whereas interest on long-term capital was considered here as a fixed expense.‘ This expense item is not entirely comparable to the interest expense commonly found in Operating statements or audits. In actual practice, interest on deferred liabilities is usually shown in the operating expense statements. However, the cost of ownership ~157- capital may be shown as a stock dividend or, in the case of reserves and surplus, no interest cost will be shown.32 The proportion of interest-incurring capital used generally varies considerably among elevators. Thus, to keep the models on a comparable basis, interest expense was calculated on all long; term capital. Long-term capital here refers to total investment 3 per model plant in fixed durable assets. E An interest rate of 5 percent was applied to the average undepreciated value of the physical assets over the life of.the f' assets. Following this procedure resulted in the annual interest on investments shown in table 46. 32 Thurston and Mutti, pp,cit.,' page 22. -158- Table 46. --Estimated Annual Interest on Investment for Model Grain Elevators, Michigan, 1961. Plant Capacity Total Annual Investment Interest in Durable on Invest- Assets menta (B.P.HIT’ : (dollars? (dollars? 750 B.P.H.rSingle-Line $110,863 $2,772 ' 1500 B.P.H.-Single-Line ‘138,178 '3,454 2250 B.P.H.-Single-Line 161,190 A 4,030 2250 B.P.H.-Double-Line 204,117 5,103 3000 B.P.H.-Double-Line 243,475 6,087 3750 B.P.H.-Double-Line 276,413 6,910 4500 B.P.H.-Double-Line 303.343 7.584 a Interest on investment calculated at 5 percent of the average undepreciated value over the life of the assets. I. I. APPENDIX C VARIABLE RESOURCE REQUIREMENTS AND COST ESTIMATES APPENDIX C VARIABLE RESOURCE REQUIREMENTS AND COST ESTIMATES The variable expense category includes all thOSe costs asso- ciated” with the plants actual Operations and volume handled. The various expenses included in this category change in varying degrees with changes in volume and.management decisions. The following expenses were included in this category: personnel eXpenses, which include the manager's salary, clerical wages, plant labor wages, workmen's compensation insurance, and social security taxes; utilities, power and light; repairs and maintenance; interest on seasonal capital; inventory insurance; general liability insurance; and miscellaneous expenses. Included in the miscellaneous expense category are such things as advertising, legal and auditing ex- penses, office supplies, plant supplies, telephone and telegraph, truck expenses, allowance for worthless accounts, Office heat, and other general operating expenses. Some of these variable expenses respond slowly to volume and size changes while others respond more prOportionally to such changes. These expenses are not entirely variable in that they are partially fixed and partially variable. For this reason, each variable expense item was budgeted separately. L b Re i ments n La C s Est t s Labor requirements were computed separately for each model plant operating under the various Operating conditions set forth. These requirements were calculated on a man-hours per load basis -160- .\ -161- for each load size received. The man-hours required per load were based on data obtained from Observations made during visits to elevators operating through- out the state. These timings include enough time for all operations within the plants various Operating phases and were based on actual timings made during these visits. A 25 percent delay factor was allowed to account for the Operators untimed movements and to" allow adequate time to move from one operation to another. The same procedure was followed, for all model plants, for‘ receiving both small grains and ear corn. These figures then be- came the basis for estimating the labor requirements for the model plants operating under the various conditions set forth. In addition to the actual man-hours required for Operating the plant, an allowance was also made for daily clean up and preventive maintenance. On the average about 45 minutes per 10 lhour day is spent on cleaning and sweeping up the plants visited. The annual hours of operation_were therefore converted to 10 hour days and 45 minutes per day allowed for each day of operation. 'One' hour-per 10 hour day was allowed for preventive maintenance. This allowance was for daily preventive maintenance such as, adjusting elevating legs and belts, oiling machinery, and for'making other minor repairs. One full time man was allowed for each plant regardless of the rnunber of annual man hours required. During the harvest season, which was assumed to be 100 hours, part time labor was added until the man hours required per hour of operation was fulfilled. ~162- Annual hours worked per man was calculated for an average week of 50 hours per weeki for 52 weeks. This gave a total Of (50 x 52 a 2600 hours per year) 2600 hours per year. Additional part time help was added for all time required over 1, 2, 3, or 4 full time men (2600, 5200, 7800, or 10,400 man hours), up to and 'including 1300 hours. For all time over113OO hours (1300 hours is equivalent to 6 months work at 50 hours per week) another full time man was added. It was found that on the average an elevator does not hire a man for over 6 months as part time labor.‘ The same procedure was followed for both single and double-line plants. It was assumed that overtime would be paid for all time over 40 hours per week. Therefore 520 of the 2600 hours was:figured as overtime (40 hours per week x 52 weeks = 2080 hours per year and 2600 hours - 2080 hours = 520 hours overtime per year). Regular time for full time labor was calculated at 81.50 per hour and overtime was figured at time and a half at $2.25 per hour. This resulted in the following annual cost per full time man: 2080 hours x 81.50 per hour = $3120 2 hours x '2.25 per hour = 2 00 hours $ 290 = Total Cost . The same over time ratio was maintained for all part time labor as was used for full time labor. The ratio being 80% at the regular rate and 20% at the overtime rate. Therefore, for each 100 hours of part time labor 80 hours was at the regular rate and 20 hours was at the overtime rate. -163... Regular time for part time labor was calculated at $1.4ogper hour and overtime was computed as time and a half or $2.10 per hour. This resulted in the following cost per 100 hours of part time labor: 80 hours x 31.40 per hour - 3112 _gQ.hours x .2.10 per hour = . 4% 100 hours $15 = Total Cost Hegel Plegts Clerical Reguizemeete egg Gee: Estieaees On the average elevators in Michigan employ one Office clerk for each five full time men employed in the plant. This figure ‘was used in calculating office help requirements for each model plant. It was assumed that each plant would require full time office help during the harvest season. Therefore, 100 hours of clerical help was included for each singleeline plant and 200 hours for each double-line-plant. In addition to the harvest season requirements, one-fifth of an hour of clerical help was included for each required hour of plant labor. All clerical help was calculated at $1.25 per hour. A 40 hour week was assumed and all hourly estimates were rounded to a 40 hour week; At this rate a full time clerk would work 2080 hours per year (40 hours x 52 weeks - 2080 hours), which would amount to an annual salary of $2600 (2080 hours I 31.25 per hour = $2600). ‘-164- o e lant Mana ement Re ui me ts and s i at 8 Management cost would be overstated if the manager's salary was allocated entirely to the grain.merchandising Operation. The time Spent by management or the manager on matters pertaining to grain and corn depends on several factors. One very important factor is the percent of the total operation that grain and corn merchandising represents. The following procedure was therefore used in allocating the manager's salary according to the annual hours of operation. _ The salary paid a manager usually increases as the size of 7 plant increaseS. This may be due to either a bonus or commission plan or simply an increased salary because of the larger business and increased responsibilities. The salaries used thrOughout this study ranged from $5,200 per year for the 750 bushel per hour plant to$10,200 per year for the 4500 bushel per hour plant. The $1,000 increase in salary between plants appears to be reasonable in. light of company audits and due to the fact that no allowance was made for a bonus or commission plan, which is a common practice in Michigan. ' The manager's salary was allocated according to the number of annual hours of operation with each block of hours receiving a certain percent of the manager's annual salary. In allocating the manager's salary in this way it was assumed that if ..the plant received grain only a few hours per year that the grain.merchandis- ing operation was of relative less importance than if it received -165- grain a greater number Of hours per year. The manager's annual salary, hours,of operation and the res- pective percent of salary allocated to each are presented in table 47. The percentages used appear to be representative of conditions as they now exist in Michigan. Table 47:--The Manager's Annual Salary Allocated According to Annual Hours of Operation For Model Grain Elevators, Michigan ' 1961. Plant Capacity Manager's Hours of Operation and Percent Annual of Total Annual Salary Salary ' ”300 600 900 1200 1500 ~ 350: 37.5% 50% e2.5% 75% “'(_B.P.H.) j 750 B.P.H. - Single-Line S5230 413001319501 $2600 $3250 $3900 1500 B.P.H. Single-Line i6200 1550 2325 3100 .3875 .4650 2250 B.P.H. Single-Line 7200 1800 2700 3600 4500 5400 2250 B.P.H.. Ibuble-Line 17200 1800 2700 .3600 4500 5400 3000 B.P.H.F Double-Line 8200 2050 3075 4100 5125 6150 3750 B.P.H. Double-Line 9200 2300 3450 4600 5750 6900 14500 B.P.H. Double-Line 10200 A] 2550 3825 5100 6375 7650 —._r_ Seeia; Security Tax Social security tax is directly related to the annual cost of wages and salaries.~ The employer pays.3 percent of the employee's salaxw'up to the point at which the annual salary reaches $4800. .Above #4800 salary, social security tax was not deducted. SThis ~166- This rate was used (3%) for computing the social security tax on all plant labor wages, clerical wages, and manager's salary. Fegkeen's gompensatien'Insugence Another expense item based on payroll is workmen's compensa- tion insurance.. The rate of the insurance per $100 of payroll depends on the risk involied in the particular Job covered. The highest rate being for those emplcyees whose principal work is in the elevator and the lowest rate being for the office workers. In budgeting this expense item an average rate_0f $2.58 per $100 coverage, based on annual payroll, was used, This is an average rate for the types of operation used in the model plants ‘ and is representative of rates used in Michigan during 1961. Invent nsurance InVentory insurance was based on an annual average plant in- ventory. This annual average inventory is based on the model plants storage capacities (20,000 through 120,000 bushels) and the annual hours of operation. The annual hours of Operation were assumed to represent the importance Of the grain.merchandising Operation to the various model plants. 'The annual average invene tory allowed for each of the model plants is shown in table 48. -167- Table 48: -- Annual Average Inventory for Model Grain Elevators Michigan, 1961. Model Plant ‘Annual Hours Of Operation and Percent of Storage Storage Capacity Allowed As Annual Average Inventory Capacities ' 300 Hours 600 Hours 900 Hours 1200 Hours 1500 Hours 30% 40% 50% 60% 70% IIMshels)—' (buSHEIs7' (bushels) Tbushels) (Eushels) (bushels) 20,000 6,000 8,000 10,000 f ,12,000 14,000 40,000 12,000 16,000 20,000 24,000 28,000 60,000 18,000 24,000 30,000 35,000 42,000 80,000 24,000 32,000 , 40,000' 48,000 56,000 100,000 30,000 40,000 50,000 60,000 70,000 120,000 36,000 48,000 60,000 72,000. 84,000 Annual average inventory was converted to a dollar basis for the purpose of estimating insurance cost. bushel of storage was used for each plant. An average price per The average price.was based on the average price of wheat and corn in 1960 and varied between the various receiving mixes as the percent of grain and corn received changed; The cost of insurance coverage for the annual average inven- tory maintained by the model plants was estimated at 9.6 cents per $100 of inventory, based on the value of the material stored. This is an average rate and is representative of rates used in Michigan during 1961. 0‘ -168- Ieteres§ ee Seaseeel Capital It was assumed that the model plants would need operating capital in the form of cash for day to day Operations. Capital would also be tied up in the form of inventories. The value of the annual average inventory, used in calculating inventory in- surance, was therefore used in estimating the annual interest charge for Operating capital. An interest rate of 5 percent was applied to the value of the annual average inventory to obtain ' the annual cost of operating capital. 1 G n r L a su n e General.liability insurance varies inversely with total annual sales and total annual volume. This insurance cost also varied depending on whether the plant had more than one truck hoist, manlift, and railroad sidings. Comprehensive and general liability insurance was estimated at 3100,000/$300,000 bodily injury limits and 325,000/350,000 property damage limits. IThis insurance cost was estimated by converting total annual volume, for the various Operating situations, to a dollar beets. This was done by using an average price of 81.85 per bushel for wheat and 81.10 per bushel for corn. The fellowing rates, table 49. were then used in estimating the cost of this insurance for the various model plants,‘ These are average rates and are repre- sentative of rates'used in.Michigan during 1961. -169- Table 49:--General Liability Insurance Rates for Model Grain Elevators, Michigan, 1961. Annual Value of Sales. Insurance Rate Cents Per 3100 of Sales TdbllarST . (cents) 0 - 650,000 2,50 cents/3100 650,001 - 1,150,000 1.05 cents/ 100 1,150,001 - 1,650,000 .70 cents/$100 1,650,001 - 2,150,000 .55 cents/ 100 2,150,001 - 2,650,000 ’ .50 cents/$100 2,650,001 - 3,150,000 . .50 cents/ 100 3,150,001 - 3,650,000 .50 cents/ 100 3,650,001 - 4,150,000 .50 cents/ 100 4,150,001 - 4,650,000 ‘ .43 cents/$100 4,650,001 ~ 5,150,000 . .38 cents/£100 5,150,001 - 5,650,000 ‘ .35 cents/ 100 5,650,001 - 6,150,000 .30 cents/3100 6,150,001 - 6,650,000 .30 cents/ 100 9 Me1n§egegce As A vegieble Expense Total annual repairs and maintenance expense was calculated at 2 percent Of the total investment in fixed assets. One~Sixth of total annual repairs and maintenance was then allowed as a fixed expense (see Appendix B). This expense was to cover repairs resulting from weathering and time rather than volume handled. The.remaining annual repairs and maintenance expense is included lhere as a variable expense to cover those repairs and maintenance requirements resulting from wear due to hours of operation and 'volume handled. - Maintenance as a variable expense was allocated assuming 1500 hours of annual operation as the maximum. A plant Operating 1500 hours .per year was therefore allocated 5/6th of the total I I. s. -l70- maintenance expense as a variable expense and 1/6th as a fixed expense. A plant operating 1500 hours per year was the only point for which the total maintenance expense was allowed for each plant. Each smaller group of hours being reduced by 1/6th of the total annual repairs and maintenance expense. Total annual repairs and maintenance expense was therefore allocated in the following way for each model plant: 1/6th as a fix- ed expense plus 1/6th for 300 hours of operation, 1/3rd for 600 hours of operation, 1/2 for 900 hours of Operation, 2/3rds for‘ 1200 hours of operation, and 5/6th for 1500 hours of operation. U§;;it;es I 1 Electric power requirements were computed separately for each model plant operating under the various Operating conditions set forth. These requirements were calculated on a kilowatts per hour basis for each piece of equipment that was Operating for each of the various load sizes received.33 The total hourly con- sumption in kilowatts was then a simple addition of the kilowatts 33 The formula used in estimating kilowatt hours for each indivir dual motor used in each model plant was as follows, see Max Kushlan, "Handboek ef Industrial Electircity," McGraw-Hill Book Company, Inc., New York and London, 1931, page 23—4. 2913s x Amps x 1,132 x 2.2. KW : 1 ,000 where; Volts = Voltage of the electrical system, 220 volts was used in all model plants. Amps = Amps used by the electric motor. The motor manufactures recommended full load amperage ‘ was used in all cases. 1.372: A constant used when calculating the kilbwatt hours of 3 phase motors. P.F. = Power factor. A power factor of 80% was used for all motors less than 5 HP and a power factor of 85% was used for all motors 5MP and over. 1,000 = Watts per kilowatt. KW = Kilowatts per hour. ' -171- used by the individual pieces of equipment. The same procedure was followed for receiving both small grains and ear corn. The actual time that each piece of equipment was operated, when. receiving each of the various average load sizes, was obtained from data gathered when the plants were visited.. These timings were used to determine the actual time per hour that the individual pieces Of equipment were actually operating. Thus, adequate time was allowed for delays and idle periods when the various pieces of equipment were not operating. The following monthly energy rates were used throughout this study in estimating the monthly cost of electric power. Energy charge: $1.40 per month which shall include 24 KWH or less, this is also the minimum charge per month, 5.0¢ per KWH for the next 26 KWH, 3.6¢ per KHH for the next 950 KWH, 3.156 per KWH for the next 2,000 KWH, 2.75¢ Per KWH for the excess. Electricity is charged on a monthly basis and depends on the kilowatt hours used during that month. Therefore the annual hours of Operation for both small grains and ear corn were divided between the twelve months so that an accurate approximation could be obtain- , ed for each months operation. This resulted in July and August being the high months in regards to electricity consumption, followed by October, September, November, December and January. The remaining 5 months were the low electricity consumption months. The estimates Obtained for electric power were assumed to include electric light consumption. Electric lights are but a -172... minor part of total electricity charge. m;scellene0us Repenses This group of expenses was included to cover the many minor operating expenses faced by grain elevators. Company audits were reviewed to determine the percent of total operating expense that the items in this category accounted for. It was found that the expenses included in this group accounts for approximately 15% of total operating expenses (this includes both fixed and variable expenses).' This group Of expenses was therefore calculated at 15% of the total fixed and variable expenses. This 15% included the following items: Advertising Legal and Auditing Office Supplies Plant Supplies Telephone and Telegraph Truck expense . Office Heat Other a... m .4 ['0 ..A d M ‘R‘dfifi‘ofi&bfih& \ O -s . 0 Total BIBLIOGRAPHY Baumel, C. 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