—w— fl ' 'v ~— _-—-—-——— _ . . . . . . ‘.'. " ' . . . . ‘ . . ' . . . . v A STUDY OF COST RELA‘HONSHIPS IN MECH'IGAN COUNTRY ELEVATORS Thai: for the Degree of M. S. MICHIGAN STATE UNWERSITY George G. Greenleaf €959 mmmyygmmmmmmmm: 31 01008 5003 , LIBRARY unduly-Sm- .Univcsdty PLACE IN RETURN BOX to remove this checkout from your record. To AVOID FINES return on or before date due. MAY BE RECALLED with earlier due date if requested. DATE DUE DATE DUE DATE DUE SEP 916,000 mo comma-m4 A STUDY OF COST RELATIONSHIPS IN MICHIGAN COUNTRY ELEVATORS By GEORGE G. GREENLEAF 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 1959 Approvedzéz/éfinma (Z 2E1!!! I 2:! ABSTRACT The objectives of this investigation are twofold: (1) to present a descriptive picture of the cost proportions and patterns of the Michigan elevator and farm supply industry as they existed when the data for this study was obtained; and, (2) to develop and study the relationship of costs to a variety of cost determinants. It is anticipated that these relationships may provide useful guides to elevator owners and managers, boards of directors, management consultants and research or extension personnel in analyzing the operating costs of Michigan country elevators. Cost data from thirty—four elevator firms were obtained in personal interviews with the managers, and from accounting records. An effort was made to select firms which were typical in terms of products handled and operational technology. Four specific cost categories are developed by combining certain individual cost items. The specific cost categories used are: (1) Labor; (2) Direct Operating; (3) Recurrent Overhead; and, (4) Plant Maintenance. The purpose of the breakdown is to implement the study of cost adjustment to changing output and capacity relationships. Total operating cost and each of the specific categories are compared graphically to output and percent capacity utilization. The real output of a country elevator is service and the empirical measure of this service is gross margin. To obtain comparability between plants, this output was converted to a computed index. Capacity utilization is based on the percentage utilization of the feed and grain equipment during an eight hour, three hundred five day year. Graphic analysis is used to relate total and specific costs to output and capacity utilization. The net relationship of total costs to output is positive and linear, except for a small curvilinear section at the output extremes. There is an increasingly advantageous ratio of costs to output, as gross mar- gin increased over all except the extreme upper limit of output for these thirty-four elevators. Labor costs are the most important component of total costs. The ratio of labor cost to output appears to improve throughout the output range. This same advantage for larger operations, based on gross margins, is true for the other specific cost categories, except at the highest gross margin level. High capacity utilization appears advantageous to the elevator business, although the number of men per plant also plays an important role in defining the nature of the change in unit costs as plant utilization increases. Several other factors which affect costs were studied. These included: (1) ratio of grain gross income of non-grain gross income; (2) monthly wage prices for labor; (3) gross sales per man; and (4) total plant investment. Comparison of these factors between ten of the plants in the study indicated that the most efficient plants (those with the lowest ratio of cost to output) had high grain volume, lower wage prices, larger gross sales per man, and greater investment in plant and machinery. All salaries and wage expenses, including commissions, insurance, retirement and social security, were related to total operating cost and total sales volume. Findings indicated that additional categorization as to size of business, investment, and product mix will be necessary for these ratios to be helpful as suggested operational guides. The ratio of the number of men employed to the volume of business, and the actual wage that labor commands, are two cost determinants that appear important in deciding the actual total cost - output relationship. This investigation points up the need for more detailed study, probing into labor costs and the efficiency of labor use. The relation- ship of investment in machinery to labor outlay is another area of con- cern. A STUDY OF COST RELATIONSHIPS IN MICHIGAN COUNTRY ELEVATORS By GE OR GE G . GREENLEAF 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 1959 A CKNOWLEDGEMENTS The author takes this opportunity to express sincere appreciation to those individuals who made this thesis possible. A special thank you is due Dr. Vernon L. Sorenson, the author's major professor, for suggestions and guidance in specifying the problem, and for his encouragement in the development of this thesis. The interest and assistance given me by Dr. Lawrence L. Boger, Head, Department of Agricultural Economics, and Professor Ralph W. Tenny, Director of Short Courses, have been an important contribution in making this study possible. Arthur J. Pursel, a former graduate student in Agricultural Economics, and many members of the feed and grain trade, have also given freely of their time and assistance when they were sought by the author. Mrs. Arlene King and members of the statistical pool were helpful in computations necessary in the empirical portion of this study. Thanks are expressed to Mrs. Ione Peeke and Joann Prendergast who typed the original manuscript. The writer is also indebted to Mrs. Beatrice Mott for her effort in typing the final manuscript. The author greatly appreciates the encouragement and understanding that his wife, Agnes, gave at all times through the course of his studies. All responsibility for errors which may be present in the completed work belongs to the author. TA BLE OF CONTENTS Page Acknowledgements i List of Tables iv List of Illustrations V Chapter I INTRODUCTION 1 The Country Elevator in Michigan 1 Basis for the Problem 2 The Sample 5 II THE ANALYTICAL FRAMEWORK 7 Classification 7 Relevance of Economic Theory 7 The Measurement of Output 11 Cost Categories 14 III RELATIONSHIP OF COSTS TO VALUE OF SERVICES 16 PERFORMED AND PER CENT CAPACITY UTILIZATION Methodology 16 Total Cost Relationships 17 Specific Cost Categories 22 Labor Costs 24 Direct Operating Costs 27 Recurrent Operating Costs 29 Plant Maintenance Costs 29 Summary 32 IV OTHER COST VARIATION FACTORS 33 Intr oduc ti on! 3 3 Total Cost 34 Labor Cost 37 Summary 44 ii TABLE OF CONTENTS Chapter Page V SUMMARY AND CONCLUSIONS 46 APPENDIX 5 1 BIBLIOGRAPHY 57 iii Table III IV VI VII VIII LIST OF TABLES Percentage of Total Gross Margin from Different Sources Comparison of Low and High Capacity Utilization Firms Comparison of Additional Cost Factors in Firms with Large Negative or Positive Residuals Labor Cost Ratio Comparisons by Sales Volume Comparative Operational Criteria in Firms with Large Negative or Positive Residuals Raw Income and Sales Data of Elevators in Study Cost Data by Category for Elevator Studied Basic Data for Total Cost Correlation with Com- parison of Estimated to Actual Costs Components of Specific Cost Categories iv Page 13 21 36 44 45 53 54 55 56 Figure II III IV VI VII VIII IX XI XII LIST OF ILLUSTRA TIONS Net Relationship of Total Costs to Output Partial Relationship between Total Costs and Percent Capacity Utilization Cost per Unit of Output by Individual Elevator Firms Net Relationship of Labor Cost to Output Partial Relationship between Labor Cost and Percent Capacity Utilization Net Relationship of Direct Operating Costs to Output Net Relationship of Recurrent Overhead Costs to Output Net Relationship of Plant Maintenance Costs to Output Ratio of Man Months of Labor to Grain and Feed Volume Ratio of Salaries and Wages per plant to Total Operating Expense Ratio of Salaries and Wages per plant to Total Sales Volume Michigan Country Elevators in Lower Peninsula for 1958 Page 19 20 23 25 26 28 30 31 39 40 42 52 CHAPTER I INTRODUCTION The Country Elevator in Michigan. There are presently about five hundred and forty country elevator businesses in the state of Michigan. These firms blanket the agricultural portion of the state, with the heaviest concentration in the thumb counties of Huron, Tuscola, Sanilac and Saginaw. The number of elevators in each region tends to vary with the amount of cash crop farming}! In general structure the elevator industry in Michigan can be broken into three segments - - the elevator chains, the cooperatives, and elevators of independent ownership. There are ten chain elevator firms in the state which control about ninety outlets. Cooperatives number about one hundred and forty-five with thirty-five of these points under one management. The balance of Michigan country elevators, about three hundred, are independent businesses owned and controlled by individuals, partners or small groups of local businessmen. Elevator -farm supply firms carry on multiple activities. They function as assembly points for the marketing of grain, and as a major supplier of inputs required in the. production of crop and livestock prod- ucts. Production inputs cover a variety of merchandise, including feeds, 1/ Michigan country elevators per county in appendix, Figure XII, p. 30 2. salt, medicants, petroleum, fertilizer and lime. Feed grinding and mixing, seed treating, grain drying, trucking and various other services are also available. Basis for Problem. Michigan elevator trade associations, cognizant of the new trends affecting elevator operations, have become increasingly concerned about the competitive pressures within their industry. A price-cost squeeze, diversion of grain marketing volumes, and short margins have been vocally denounced within the industry for several years. These conditions and the accompanying pressure on business management has set the stage for some necessary critical business analysis. Outside the industry, the farmer—dealer has taken over some of the seed corn, fertilizer and feed business. An apparent trend toward direct selling of fertilizer and feeds by the manufacturer to the farmer has also increased the industries'concern. Vertical integration has directly affected the operation of some elevator -farm supply businesses. For the reasons cited, plus others of less importance, management has been foreced to examine its operation and to inquire earnestly into busi- ness efficiency. Business efficiency can be defined as a ratio of output to input. In monetary terms, this can be expressed as the ratio of total revenue 2/ to the total cost of the business - .$% .— Both numerator and denominator 2/ Expression of physical ratios in monetary terms is of course valid only where perfectly competitive pricing is assumed. of this ratio is influenced by physical volume and unit price. Pursel's s tudy 1/ of Michigan elevators pointed to a greater physical volume rather than high margins as the more appropriate objective, if manage- ment desires to increase earnings by increasing revenues. Because gross margins tend to be controlled by competitive conditions, industry leaders have stressed the need for merchandising and more salesman- ship to build volume. However, the approach has often failed to pro- duce greater earnings, even though volume is increased, because costs are not controlled. Elevator management has also been concerned with the denomi- nator of the business efficiency ratio-total cost. For years auditors have broken down operating costs in some detail, to provide the basis for using numerous cost ratios in decision making. Management has accepted this accounting cost breakdown and the pertinent business ratios as operational guides. Two examples of such ratios are the 4/ relation of costs to output or labor cost to total costs.- These cost or operating ratios are helpful in the description of the past or historical performance. However, they are of limited 3/ Arthur J. Pursel, "The Use of Functional Analysis in Evaluating — the Operations of Michigan Elevator -Farm Supply Businesses". (Unpublished Master's Thesis 1957) Michigan State University, 1957, p. 58 4/ H. E. Larzelere and R. M. King, Ratios as Measuring Sticks for Elevator and Farm Supply Organizations. Special Bulletin 380, Agricultural Experiment, Michigan State College, August, 1952. value in suggesting corrective solutions because of the fragmentary nature of the analysis and the lack of any consistent analytical frame- work for evaluations of the ratios either individually or collectively. The elevator trade is in need of analytical methods which can provide the basis for developing meaningful relationships between specific cost components and relevant factors which influence cost levels. Costs can usually be controlled and manipulated more pre- cisely and often more effectively than sales or margins. Hence, effec- tive guides for cost analysis and adjustment can often be of greater value in the improvement of net revenues than a program to increase volume or net margins. This study was taken to provide such guides by attempting to discover factors that affect costs, and in turn business efficiencies. Efforts will be made to develop meaningful cost relationships that can be of use to the industry in obtaining a better understanding and evalu- ation of it's enterprise. The initial step in such an effort is to provide a picture of "what is" before making any decisions on ”what should be”.'5' Hence, the major effort of this study will be a descriptive picture of industry cost patterns and proportions as they existed when the data in the study were obtained. It is also designed to provide some definitions _5_/ Frank Knight, Risk, Uncertainty and Profit, (New York: Houghton- Mifflin Co., 1921). p.p. 206-208 and possible tools for developing understandable cost relationships, as they exist; but must necessarily fall short of a comprehensive cost analysis. This is basically a probing descriptive study of existing cost patterns. Shortage of the necessary detailed data will not permit a com- plete evaluation of technology, personnel, and other factors which in— fluence costs. The Sample. Data were obtained from for ty-two elevators, which represent about 8% of the country elevators in the state. Finan- cial records of the firms were obtained along with additional data in the form of a questionnaire which was completed during a personal interview with the manager of each firm.— Efforts were made to select businesses which were typical of the country elevator - typical in the sense that the sample would reflect the kind of product and resource mix most common throughout the state. Firms with a business volume of less than $200, 000 were not included in the sample. Organizations with unusual operations, such as egg buying stations or lumber yard operations were also excluded. The sample included the businesses regardless as to net gains or losses in their annual operating statement. Several of the plants visited were later excluded from the study because of questionable accuracy of the data. In most cases, these were small plants without adequate records and considerable estimating 9/ A copy of the questionnaire is included in the appendix. p.p. 59-68 would have been necessary to break down cost and revenue items into useful categories. The final sample contained thirty—four firms with an average volume of business of $712, 028. 77.— They operated with a total gross margin of $100, 156.73, expenses of $88, 309. 25, and an average net income of $13, 006.47.'8‘/ In Chapter H the analytical framework of the problem will be laid out in detail. Classification of costs, the definition of output and its measurement and the definitions of cost categories are included in the discussion. The relationships of costs to value of services per- formed and percent of capacity operation are the subject of Chapter HI. Certain other factors which affect costs and business efficiency are the basis of the work in Chapter IV. The fifth and last chapter is a sum- mation of the work included in the study with a suggestion concerning additional research. 7/ Sales and income summary is in the appendix, Table VI, p. 53 8/ Net income includes "other revenue”. CHAPTER II The Analytical Framework Classification. Country elevator firms may differ widely in their operations. These variations may appear in the volume of busi- ness, organizational structure, technology employed, nature of market- ing services, and quality of personnel. The thirty—four plants included in this study are selected with reference to their degree of homogeneity in the following respects: only firms which handled both grain and feed were included in the sample, and care has been taken to select organi- zations with a substantial degree of likeness as to the nature of the other marketing services performed. Though technical differences exist among the plants, in terms of size and kind of equipment, the overall technology of the plants is quite similar. Relevance of Economic Theory. Economic theory is relevant to the study in several respects. First, it is a necessary preliminary step to development of conditions which are of direct concern to the analysis of cost behavior. Theoretical analysis provides guidance in choosing the most likely shape of the cost-output relation. Then by building graphic and statistical evidence on a theoretical foundation, it is possible to compare the theory with the actual results. The theoretical cost curves and models lead to a systematic study of cost behavior which should be of value to management. 7. When dealing with cost as a function of output, theory distinguished between the long run and the short run.“ In the long run, all input factors are considered variable so that the output results from differ- ent combinations of inputs without limitation because of the fixedity of some factors. Inputs are assumed to be completely adapted for mini- . . 10/ mum total cost at the firms optimum rate of output.— In the short run, inputs are partially fixed and partially variable, i. e. , output can result from more than one combination of inputs, but one or more factors is fixed. '- There exists a relationship between cost and a number of independ- ent variables which include output, capacity utilization, price of inputs, variety of services and others. In the empirical treatment of economics of the individual firm, the short run cost function refers to the relation- ship between cost and rate of output, with a given physical plant. It is further implied that all other factors which affect cost remain unchanged. More particularly, any measurement of the relationship between costs and output, for an existing firm, is intended to show what costs would be at various volumes, if there are no changes in factor prices, selling costs and the nature of physical output-input relationships. Such a cost 9_/ Joel Dean, Managerial Economics, New York; Prentice Hall, Inc. , p. 272. 19/ Ibid, p. 273 11/ It should also be realized that there exists a great many short _ runs, depending upon the fixed factors and the adjustment of the variable inputs. 9. function excludes cost differences, due to independent external influ- ences (for instance the bargaining force of labor unions), and also any secondary or derived changes caused directly or indirectly by changes in output by the firm. For example, although factor prices might be initially constant, a variation in output could be so significant to the particular factor market, as to influence prices, and thus indirectly affect costs. An increase in output also could lead to additional wages on an overtime basis. An opposite effect would result if materials could ‘be purchased at a lower price because of quantity discounts on the increased size of order, or costs may vary with output owing to induced changes in the productivity of variable factors, as for example, if lower quality labor were employed at higher output levels. A proper determination of the cost - output relationship eliminates such indirect or induced effects on cost variation, associated with volume. This study, using as it does, cross sectional data for the basic cost dimension, does not lend itself to complete specification of this theory. In terms of the major criteria established above, it is reason- able to assert that there is no relation be tween volume and increased costs due to the need for employment of over time labor or lower quality. labor. There appears to be little, if any, relationship between volume and level of factor prices. Factor prices relationships may, however, differ due to location. Plants located near metropolitan centers may pay higher wages, due to the influence of union wage rates, 10. than plants in a more distant rural community. Transportation costs vary fifteen to twenty-five cents per cwt. across the state, and cause cost differences in certain inputs. However, this lack of uniformity is relatively minor and is not directly related to size of business, e. g. , there appears to be no correlation between volume of business and factor prices. A major problem in evaluating the data is that associated with differences in plant size. It is extremely difficult to determine a precise measurement of plant size. Several suggestions are: dollar volume of feed and grain plus service income, total investment in plant and equipment, and the rated capacity of the feed and grain opera- tion. The use of dollar volume gives spurious results because of prod— uct - price variations, differences in nature of business due to crop production characteristics and government grain storage regulations. Total investment in plant and equipment is an inadequate measure be- cause of variations in original cost due to age and price levels. Rated capacities of grain and feed handling equipment appear to give the most accurate measure of plant size. Necessarily, these capacity ratings do not fully take into account actual bottlenecks which influence the speed with which the plants can handle customers, nor do they account for variations in the proportion of volume in the different plants which results from grain and feed operation relative to side lines. 11. The theoretical short run cost relationship, therefore, does not hold completely in the analysis which follows, nor in fact does the long run where complete flexibility of all factors is assumed. However, it is felt that the theoretical framework for short run cost analysis is a useful analytical guide for evaluation of the data which are available for the study. The Measurement of Output. The measurement of output for a marketing firm such as an elevator, with its multiple activities, is not immediately obvious. So‘me economists feel that the output of a market — ing firm is the package of services through which time, place and possession utilities are added to the commodities in the marketing pro- cess. 1"" The Dean and James study on cost behavior in the retail shoe industry derived this definition: ”that the output of a retail enterprise 13/ consists of the services which it renders to purchaser". -— Gross margin, the difference be tween the purchase price and the sales price of goods, appears to best represent the amount of money the purchaser pays for the marketing services performed. It is roughly analogous to value added in manufacturing. 12/ Robert G. Seymour, "Cost Concepts in Marketing", (Unpublished Ph.D. Dissertation, 1953) University of Illinois, 1953, p. 147. 1_3_/ Joel Dean and R . Warren James, "The Long Run Behavior of Costs in a Chain of Shoe Stores, A Statistical Analysis", The Journal of Business of the University of Chicago, Studies in Business Admini- stration, XII, April, 1942, p. 35. 12. Gross margin is derived from many sources in the elevator. These are aggregated into a single dollar output category. Pursel, in his functional analysis work with these elevators, decided gross margin was the best index of marketing services although certain computations had to be made so that competitive situations, location factors, and managerial policy differences were eliminated.13 This places all firms on an equal basis so that inter-firm comparisons are of added value. Computation of the index was made after the data from the ele- vators had been summarized and the gross margins determined along with the physical amount of each input or investment category. The gross margins for each item were aggregated for the thirty-four ele- vators along with the physical quantities handled. The total gross margin was then divided by the quantities sold to obtain the weighted average unit gross margin for each of the many output categories. The weighted average unit gross margin was then multiplied by each firm's physical quantity to get the index value of marketing service for that commodity or service. The individual index values were then added together for each firm to get an aggregate value of its marketing services. Hereafter, this index will be referred to as gross margin. 14/ Pursel, 92.11}, p. 9 13. Grain operations are the primary source of service revenue for elevator firms. Table I has been developed below to show the major sources of the elevator's gross margin. It is apparent that nearly 2/3 of the total gross margin of these firms comes from merchandised grain, processed grain or services pertaining to the grain operation. TABLE I Percentage of Total Gross Margin from Different Sources All Grain Operations Farm Production Supplies 60. 4% 39. 6% Merchan- Misc. dised Processed Service Fertilizer Seeds and Farm Grain Grain Income Petroleum Supplies 70 ‘70 070 (70 (70 (70 18.08 20.09 22.25 6.56 . 15.79 . 17.23 The proportion of the gross margin obtained from these two different sources is fairly consistent for all firms. Only thirty percent of the firms obtained less than fifty percent or more than seventy-five per— cent of their gross margin from all grain operations. Analysis of the cross sectional cost data from these firms is undertaken to provide a .general picture of at least a few elements in the cost relationships of . 1 / ' . . . the elevator firm. " The study prov1des a ba31s for analyz1ng some of the important reasons for cost differences between plants within the 1_5/ Cost Behavior and Price Policy. Committee on Price Determi- nation for the conference on price research, National Bureau of Economic Research, New York, 1943, pp. 28 - 32. 14. sample and should provide management with additional insight in the problem of cost adjustment. Cost Categories. The breakdown of total costs in this study was made as follows: Labor, Direct Operating, Recurrent Overhead, and Plant Maintenance. Labor costs includes all outlays for labor with the exception of management and bookkeeping. It includes salaries, wages, pension plans, and social security. Direct operating costs are those items which vary with volume of business in the short run. Items in this category include power, fuel, telephone, bad debts, advertising and hired trucking. Recurrent overhead costs are those costs not directly variable with volume. Included in this list are interest, prop- er ty tax, management and bookkeeping expenses. Plant maintenance represents the cost of maintaining plant and equipment. The category includes insurance, repairs and depreciationlél Why was this breakdown used? One purpose of this study is to develop more meaningful specific cost categories for the purpose of analyzing adjustment to changing output and capacity relationships. Labor costs make up nearly one —half of all operating expenses, and are easily adjusted through the managerial process. This is sufficient to place labor in a separate cost category. Plant maintenance is an expense unique in nature and appears to be most useful when isolated. 16/ Components of the specific cost categories is included in the appendix, Table IX. 15. The remainder of the costs have been categorized into two groups on the basis of flexibility in the short run. The following chapter will develop in detail the relationship of both total costs and the specific costs mentioned above to output and to capacity utilization. The technique of graphic analysis will be used to show the results. Graphic analysis is a method of using graphics as an equivalent to the mathematical method of correlation analysis.11/ The first approximations to the partial regressions are obtained and then successive approximations modify the initial relationship until the correlation is accurately obtained. 1_7/ Mordecai Ezekiel, Methods of Correlation Analysis, Edition 2, New York, 1941. CHAPTER III Relationship of Costs to Value of Services Performed and Percent Capacity Utilization Methodology. The graphic method of multiple correlation is an offshoot of the standard mathematical method. The simplest form of the standard method involves the assumption that the data are related in a straight line fashion. If this assumption is not valid and the re - gressions actually are curvilinear, the linear mathematical method yields inaccurate results. Few relationships in economics are strictly linear in either arithmetical or logarithmic terms. Therefore, graphics can often give more meaningful results than those obtained by mathe- matical computation.l"' One of the aims, of this study is to discover the shape of the exist- ing cost relationships, not to decide their nature and then derive them statistically. The first step in the graphic method of correlation is the plotting of the dependent variable X 1 , against one of the independent variables, such as X2 , in an ordinary scatter diagram. A regression line is approximated from these data. This first approximation indicates the gross relationship between X 1 and X2 . In order to take account of additional independent variables, a second diagram is developed in l_8/ Frederick V. Waugh, "Graphic Analysis in Economic Research", Agricultural Handbook No. 84, USDA, Agricultural Marketing Service, Washington, D. C., June, 1955, p. 2. 16. 17. which the vertical deviations of the observations from the regression line in the X - X 1 2 chart are plotted against the second independent variable X3 . The best visual estimate of the regression line, linear or curved, can then be drawn through these points. Successive approximations, contributed by the ”Bean" method of graphic analysis provides a means of progressively improving the first approximations.12/ In order to accomplish this, the vertical deviations from the second chart are plotted about the initial regression line on the X 1 - X2 chart. Then a regression line is drawn through the new points in such a way that the scatter is reduced. This gives a second approximation to the partial regression between X1 and X2 . These new deviations from this second approximation line are now plotted about the original regression in the second chart. A new regression line is approximated and these steps are repeated, as necessary. The last set of observations about the final regression line represent the 20/ partial correlation between X1 and X2 . — Total Cost Relationships. The first relationship of concern is that of total cost to value of services performed with capacity utili- zation held constant. Table VII on page of the appendix gives the basic data for the thirty-four plants used in the study. Note should be 12/ Louis H. Bean, “A Simplified Method of Graphic Curvilinear Correlation”, Journal of American Statistics Association, Vol. 24, 1929, PP. 386 - 397. 22/ De tailed description of the graphic method of analysis can be found in Frederick L. Thomsen and Richard J. Foote, Agri- cultural Prices, 2nd Edition, McGraw-Hill Company, New York, 1952, pp. 296 - 304 18. taken that the value of services performed is the output of the firm and is a computed figure. The capacity utilization is the figure derived from the feed and grain operation only. The regression is shown graphically on the following page as Figure I. A linear relationship exists except at the upper and lower extremes. The upper curvature is largely the result of only two large country elevator operations. The sharp decline at the lower limit is affected by several plants. No explanation can be given at this point for these variations at the output extremities. The graphic relation- ship, on the whole, does resemble the typical total cost-curve set forth by economic theorists. Figure II illustrates the partial relationship between total costs (X 1) and percent of capacity utilized (X 3 ). Twelve plants operated at or below fifteen percent of capacity. The balance or twenty-two firms were between the fifteenth and fortieth percentils. The expected result was a negatively sloping relationship be tween total costs and capacity utilization. It was suggested that as percent of capacity utilization increased, the partial relationship with total cost would also decrease. A glance at Figure II shows a much different situation. It is curvilinear with two distinct negative slopes connected by a short intermediate positive slope. A study of these two groups of twelve and twenty-two firms does not provide a complete explanation of the form of this relationship, but 19. who, Noom. .00: .No: a 0.. 501. .404? 083308.... 9. as n_@cmm H 2m... mmr>452mlzu O... ._.O._.>_I nOmfim 4.0 OC._._uC._. h b 1 1 no mo .mo ac nOIvCAMO 030mm _ZnO§m A _.ooo.m O... a V moo who moo 20. jmcmm HH man/£43.! mmF>._._OZMI=u wm4<_I OOmAM >20 .ummanH O>_u>n_._.< C._.__I_N>._._OZ WC? 0 NO... UM<_).—._OZM cm .9. 4.04).! 8M4. O 4.0 o OCH—0C4. 1.0.. o 0. INC: 0 o o All IUO: w m m m. 6 _.m r... _.a W8Mm-w~m$wwuwwwowsoswsw nmxnmza 926.3 S.__._N>:oz 21. some factors can be discussed. The twelve plants which operated be- low the fifteen percent of capacity level, hereafter designated as Group I, have some similarities to the twenty-two plants operating above the fifteen percent mark, hereafter called Group II. The type of business enterprise, as found by the grain-feed ratio was much the same for both groups. Also the total replacement value of plant and machinery was nearly the same; Group II's average of $175, 000 exceeding Group I by only $9, 000. Differences were found in actual capacity available, number of men per firm, inventory turn and the monthly wage price of labor. The actual group averages are given in the Table II below. TABLE 11 Comparison of Low and High Capacity Utilization Firms R eplacement Ton' s Manpower Inventory Monthly Value of Plant Capacity per Turn Wage and Machinery Available Plant Price Group I $166,000 68,600 10 12 $309 Group 11 $175, 000 55, 700 14 15 $338 There were also some striking differences between the plants with positive deviations and those with negative, regardless of their group. For instance, those firms above the zero value line showed a lower volume of business, more personnel, a lower inventory turn, and fewer sale dollars. per man. The plants with the negative deviations in each group were opposites in these comparisons - they had more volume, less personnel, higher inventory turn and larger sale figures 22. per man when compared with the other plants. In both Group I and II, the plants with the higher percent capacity utilization had larger total gross margins. This contributed to the two similar negative slopes shown in Figure II. Additional research will be necessary before this relationship can be fully explained, particularly the sharp positive slope between the fourteenth and eighteenth percent capacity. Figure III depicts the average unit costs of these firms as found by using the cost regression figures in Figure I, and dividing these costs by their respective computed outputs. This curve illustrates one of the basic cost theories of economics - a rising level of costs at both the lower and higher levels of output. Insufficient output in relation to over- head costs results in high unit costs where volume is small. On the other hand, at the higher levels of output, the necessary services and facilities required to bring about this large output often raises the average total cost. Figure III demonstrates this quite well, although it should be pointed out again that only two of the firms operated beyond the $200, 000 output level, and any specific conclusions drawn at this higher output might prove inaccurate with additional plants and data. SPECIFIC COST CATEGORIES. The largest single component of total cost for all of the thirty-four plants is the cost of labor. This cost, which includes all labor expenses except management and book- keeping, is about forty-six percent of the total operating cost or $41, 000 for the average firm. Recurrent overhead and direct operating cost 23. n.0cmm UH 00m... .umw C23. 0... OC4VC... m< _ZO_<.UC>.I mFm<>HOm .2me I)mOD OOMHMCbOOM 0.". av 2m... mmr)..._02mI=u 0... _r>w0...~ 00m._.m 40 OCHDC... P P 1 ‘ .b0 .00 nozncqmo anemm_zno:m 2.085. 0.. .3 NNO Nmo woo 26. we; mo: om<_>jozm o... .0: C60» moms. on...” so ocjucfl Lo: umo: uwo: flmcmm H U>D._._>_I mmr)....02mI_.u mm._.<<.mm2 _I>w0.» 00m.._. >20 .ummOmZ... 0>v>0_...< C..._.I_N>..._OZ a m 6 _.~_w mm _.m~.o~wmm_~.omwwou.~wwwwww8s.m .ummnmz... 0>.u>0_...< C..._..._N>...._0Z 27. capacity utilization (X 3 ) is graphically presented in Figure V. The regression is slightly positive at the lower ranges, but becomes nega- tively sloped at the higher capacity utilizations. The regression as drawn reflects very little labor economy because of variance in plant utilization. Extremely high labor costs of plants one and five, at the low capacity range, have considerable effect on the shape of the re- gression. Nevertheless the effective use of labor by several of the firms in the lower capacity utilization group is noticeable from the figure. They appear to have hired capable men, paid them more wages and averaged less men per plant. Direct Operating Costs. These expenses are those items, such as power and supplies, which should vary with volutne of business in the short run. The relationship of costs to output is developed in Figure VI. The regression is linear except for a slight curvature at the upper extreme of output. The direct operating costs appear to level slightly off at low output and increase noticeably at the largest output. The weighted average of direct operating costs to total costs for all plants is eighteen and five tenths percent with extreme values in indi— vidual plants of twenty-eight and nine percent. The regression shows only a slight benefit at higher output levels for the use of direct operating funds and even this disappears at the extreme upper range. The percent capacity utilization relationship to the deviations of direct operating costs and output is not significant. Only at higher capacity utilization is Zacmm H... 2m... mmr)..._OZmI..u 0... 05mm”... 03$»)...an OOmdw 40 OC....uC._. .09 10:50... Own—"$4.20 howdm 2.83 2. 3 no: 09. 3. N? oT L P r I. r ~.o co _Mo .ro .mo -o woo 8:343 263 .282” 2.8.... o... a. 29. direct operating cost reduced and even then only slightly. Recurrent Overhead Costs. This category includes taxes, book- keeping and management costs, and other items which are recurrent, but do not vary directly with volume of business in the year's time. A graphic presentation of this cost relationship to output is shown in Figure VII. This regression is linear throughout the range with a moderate positive slope. There is a tendency for new plants, or those with new facilities to have the positive deviations. For instance, the plant with the highest percentage recurrent expenses is one with a completely new facility. However, other factors such as large indebted- ness, higher bookkeeping expenses, and a higher tax base, can increase the amount of recurrent overhead expense appreciably. It has been suggested that the older plants have a lower tax base in most instances, and that lower priced management in the older plants has had an effect on cost relationships in the sample of plants studied. The percent capacity utilization relationship to the deviations of recurrent overhead costs and output is not significant. The slope indicates that percent of capacity utilization does not materially affect recurrent costs within the range of the data included in this study. Plant Maintenance Costs. These costs include repairs, deprec— iation and insurance. The relationship of this cost category to output is shown in Figure VIII. It has a positive linear relationship over most of its range. At the high output a noticeable upward curvature is found nacxm Kn 2m... mmfijZmlzu 0.... wmncwmmz... O0 00m...m ...O 0C.....uc... .ooafirmncmmmz... OO OOmdm 2.000.... 0... .3 mo: 00.. .8: mo.r o a - ~o no .8 .wo _.oo -o mwo nozncamo 26mm .2825 A Seed 0.“. a. 31. nacmm EH 2m... mmr>fi_OZmI.V O... .u...>Z... Z>_Z...NZ>an OOmHm ....0 OC...uC... mo Lur>24 §>_Z...mz>znm 00m...w m 2.0on 0+. .3 00.. so: NO. 0. N0 00 .00 .50 .00 NNO N00 020C450 OmOmw .ZOOim 2.0006 01 a 0 32. are responsible. The two elevators mentioned above are old plants with several buildings which carry high insurable rates and need repairs continually. 2—1/ New plants built with long life fire preventive materials tend to lower costs in this category. There is no discernible relation- ship in the percent capacity utilization and the deviations of this category. summary. Because of the relative importance and variation of labor costs, it would seem that labor management is an important key to efficient elevator operation. It appears that additional research could provide the basis for more effective use of labor. In no other specific cost category is variation as great between plants. An important guide for elevator management may be the gross sales per man. The goals of $50,000 per man, a current trade figure, should probably be doubled if a top grade labor force is to be main- tained. Pursel found that labor in Michigan elevators returned barely enough to cover its cost.2-Z/ Additional study of these categories and their returns per dollar expended should be useful to elevator managers. 21/ The deviations about this regression line represent the smallest extreme variation of any of the specific cost categories. 2_2_/ Arthur J. Pursel, ”The Use of Functional Analysis in Evaluating the Operations of Michigan Elevators - Farm Supply Businesses", Unpublished Master‘s Thesis, Michigan State University, 1957, p. 35. CHAPTER IV Other Cost Variation Factors Introduction. Cost behavior results from other factors than those discussed in Chapter III. These cost elements and even their relative importance will vary from one firm to another and from one type of business to another. Joel Dean lists several additional determi- 23/ nants of cost that appear important in most any modern firm. — Prices of input factors Technology Size of transaction . Stability of output . Labor Efficiency U'IIhUJNI—I There is insufficient data to discuss either the effect of transaction size or output stability, although both of these appear to be important in determining the cost structure of the elevator. That elevator manage- ment is concerned with these aspects of costs is revealed in several ways. For instance, many managers have endeavored to increase the lot size through the promotion of bulk sales and selling techniques. The problem of output stability (has become increasingly important in recent years because of the effects of the governmental farm programs and the dynamic trend of agricultural technology. The industry has used resale 23/ Joel Dean, Managerial Economics, Prentice Hall, New York, 1951, p. 253. 33. 34. men, the grain bank, and a diversified farm service program in an effort to make their business stable and insure a more equal month to month volume. Looking to the future, vertical integration may become an important element in this picture. The balance of the cost determinants suggested by Dean; price of inputs, technology, and labor efficiency are in part reflected in certain variables which can be obtained from the available data. Two approaches suggest themselves in attempting to further explain cost variations between plants. First, derive the estimated costs from the regression relating total costs to the two independent variables - output and per- cent capacity utilization. Then compute the residuals from the actual cost and attempt to relate these differences to additional cost variables. The second approach is to study in some detail variability in the inde- pendent cost categories. Both methods will be used to develop a better insight into the nature of costs in elevators. Total Cost. Consideration will first be given to the total cost relationship, then a more detailed analysis of labor costs will be under- taken. Labor costs are considered in more detail, because of their influence on the total cost structure. The residuals studied in this section are those developed from the correlations graphically pictured on pages nineteen and twenty. They are the result of the relationship of total costs to output, as represented by computed gross income (the value of services performed), and plant utilization as depicted by 35. 247’ percent capacity utilization in the feed and grain operation. — The total cost is then estimated from the two regression lines and the values of the independent factors for the respective plants. The amount of variation between the actual total cost and the estimated total cost represents the total cost variation unexplained by the correlation. The objective is to locate and further develop other cost determinants that would explain, in part at least, these residuals. Only those variables which seem appropriate and measurable are studied. Those finally employed are: Percent grain gross income of non-grain gross income Monthly wage prices (all labor) Gross sales per man Total plant investment #WNr—n These independent variables in part reflect some of the important cost determinants mentioned previously. Wages reflect the price differen- tials in the most important input category. Investment will, in part, reflect differences in level of technology while gross sales per man should suggest the overall efficiency of the labor force. The other variable - ratio of gross income from grain merchandising to gross income in all other operations is included in an attempt to measure enterprise cost differences which are not reflected in the charge or gross margin obtained from each type of activity. 24/ These data with resultant residuals are shown in the appendix Table VIII, p. 47. 36. The following tabular analysis of the additional cost factors men- tioned on page 35 is given to provide some indication of their effect on total costs. Ten plants, five with the highest negative residuals and five with the largest positive residuals are compared to the average of 25/ the thirty-four plants studied. "‘ TABLE III Comparison of Additional Cost Factors in Firms with Large Negative or Positive Residuals Ratio of Gross In- Gross come from Mdse. Monthly Sales Total Plant Grain to all Other Wage Rate per man Investment Gross Income (Dollars) $1,000's $1,000's 5 Negative 54. 3 $315 84 , 379. 5 Residuals Average of all 29. 3 $328 56 263. 7 34 plants 5 Positive 19. 3 $361 48 286. 8 Residuals The comparison of these additional cost factors present some interesting relationships between the two groups of cost residuals. It is quite apparent that the plants with the largest negative residuals obtained more gross income from grain, paid lower wages, had more gross sales per employee, and invested more in plant facilities than those with the positive variations. It is also significant to note that the 25/ Plants 26,27,28,3l and 33 make up the negative residuals, with plants 6, 13, 16,23 and 30 representing the positive residuals. 37. average of the thirty-four plants lies between the results of these two residual groups. This tends to verify the opinion that the positive residual results were nearly opposite in each of these cost contrasts. The five largest negative residual firms operated at an average cost of only eighty-three cents for each dollar of gross margin. The five positive residual plants averaged $1. 05 for each gross margin dollar. This would appear to point out the value of operating the ele- vator with management's eye on the achievements of the negative re sid- ual group, at least as far as the cost factors above are concerned. It is probable that the addition of certain other variables, either unknown or unmeasurable, could further explain much of this cost variation between plants. Labor Costs. This section is developed to make observations into labor cost factors for the purpose of developing additional inform— ation about both variation of labor and total costs. Figure IX compares labor in man months to the grain and feed volume in physical terms. There is considerable variation between plants in quantity of labor per ton. For example, approximately two hundred and fifty man months are used in individual plants where quantity of grain and feed handled varies from 7,800 to over 20, 000 tons. The exact causes for these wide variations cannot be pinpointed precisely, however, some of the plants with the more efficient labor utilization (according to Figure IX) appear to be those operations with higher paid management, better than average sales 38. program, and the facilities to take care of a peak crop handily. The two less efficient grain and feed plants, shown at the upper left in Figure IX, have an average positive cost residual of thirty-seven, while the two most efficient plants, shown at the lower right of the figure, 26/ I have an average negative residual of fifty-eight. " This would seem to indicate that the more efficient plants, total costs relative to output, need proper facilities to effectively make use of their manpower. The second part of this labor cost analysis involves the study of total salaries and wages paid to all employees, including office help and management. " This expense is first compared to total operating expense, and then to total sales volume of the thirty-four plants studied. Figure X depicts the relationship of salary and wage payments to the total operating cost for each elevator, individually. The graphic pre- sentation has a minimum of scatter which seems to indicate a rather consistent relationship between these two factors. Further study shows that salary and wage payments, which average fifty-four percent of total costs for all elevators, varies from a high of sixty-eight to a low of only forty-six percent. Michigan elevator management has a ”rule of thumb”, which suggests a top limit of fifty-five cents for salaries and 26/ These residuals are those computed from a regression of total costs to the two independent variables - output and plant utilization. 27/ This differs from previous analysis in that only plant labor has been included until now. 39. nacmm HM 3.9.20 0n §>2 Z02...Im On 7.900.» ._.0 OmZZ >20 nmm0 00.p Armmm 0.2).? >20 {03.90 c umo. {>2 zozqzm N00: N50: N004. . . 00.. . N0: mo; o ZOfimnn>Om fimF)..._OZMI..u #0.. 0x222 nmmmx>zov A o _m a mo NS No 0:22 >zo ammo ..._O On m>.l>_»_mm >20 <<>Omm .um.» .u...>2... ...O ._.O...>.I Onmm>..._20 mxanmmm -m>r>m_mm o. 233 cooow 0... 3 .mo _‘ .00: 00: mo: 8.. zoamflm>om mmtpjozmxfi mo: 3222 nmmm1>zo v o m x x x x w n x x x x L. mo no oo oo _oo _mo :5 .8 .mo moo mmo m8 3.042. 0332.20 mxnmzmmm C.ooo.m 0.. 3 41. wages of each expense dollar. This "top limit” was equalled or excelled by exactly one half of the plants in the study. A check with the two cost residual groups, previously studied, revealed that both the high and low plants spent on the average of fifty-four cents for salaries and wages of each dollar of total expense. Apparently, this relationship is not as critical as many industry people have presumed. At least it does not seem an important cost relationship in this sample of plants. The relationship of salaries and wages to sales volume of the 28/ thirty-four elevators is shown in Figure XI. — There appears to be a wide variation between plants. Actually, the weighted average of all elevators in the sample is six and seven tenths percent of salaries and wages to total sales volume. The individual high and low vary from eleven and four tenths to two and nine tenths percent, respectively. Many managers use a suggested danger zone of eight percent or over for this relationship and fifteen of these plants were in this "zone". The seven plants with lower wage payment to sales, as shown at the lower right in the figure, are firms which averaged sixty percent of their sales volume from grain marketing. The four elevators which had a high salary and wage to sales volume, shown at the upper left in Figure XI, averaged only twenty-eight percent of their sales from 2_§/ Sales volume represents total dollar volume and includes both wholesale and retail business. 42. n.0CDm NH m>..._0 0n m>_l>.»_mm >20 <<>Omm Um.» .u_l>2... ...O ...0...>_I m>_lmm r>2_mm o. $03 208.... 0w 3 .00.. 00.. 204m...>om mmr>fiozmxzu om>sz 3mm {.20. N0; . _.o _.m _.o _.o _.o mo Mm my 4042. m>rmm <0rczm coo.ooo.w 0... 3 I00 5.. 0 0 _ .. I‘ "I ‘ :‘.-. r-z 43. grain. Grain handling produces dollar volume much more rapidly than feed or farm supplies and produces relatively less gross income per dollar of sales, because of the small margin maintained in grain merchandising. Salary and wage payments to dollar volume appear of little value for comparative cost analysis, unless the commodity mix of the volume is known. In summary of the labor cost relationships, at least two impor- tant findings should be emphasized. First, the cost of labor is para- mount to management as an important determinant of total costs. The cost of this input can be modified by elevator management through wage price, as well as, by ratio of men to output. Both of these factors have a direct influence on labor costs as developed previously. More atten- tion to these two labor cost criteria would appear beneficial to manage- ment. The second issue is the apparent breakdown of the two "rules of thumb” commonly used by the elevator trade. Both ratios of salaries and wage payments to total operating cost, and then to total sales vol- ume, did not seem capable of representing relevant cost patterns or boundaries in themselves. Additional information regarding the size of business, investment in plant facilities, and the product or commodity mix are needed if these ratios are to be meaningful. Evidence of the differences that arise in operating ratios is shown in Table IV, where several labor cost ratios are compared at different levels of sales volume to the average of all plants. 44. TABLE IV Labor Cost Ratios Comparisons by Sales Volume Number Labor Cost Labor Cost Labor Cost as of as a % of per a % of Output Plants Total Cost Dollars of Sales (Gross Margin) Up to $500,000 16 40.3 .062 38.7 $500,000 to 10 41.5 .047 38.6 $950, 000 Over $950,000 8 46.0 .041 37.1 All Plants 34 43. 0 . 053 37. 9 Only the labor cost to output appears to have stability and even in this case individual plants vary in this study from thirty to fifty per- cent. Summary. In summary of this chapter, discussion of other cost variation factors, Table V has been developed. Comparison of the positive and negative residual groups to the average of all plants for the purpose of demonstrating, and at the same time summarizing the trends of pertinent cost determinants is useful at this point. It is noticeable that the plants which have the larger negative residuals operate at a lower cost with high sales. Their number of employees is low. It would appear that investment per man should be sufficient to efficiently handle the farmers products and farm needs. The five plants in the high positive residual group have not been as successful in keeping their costs low, or in expanding sales. 45. These operational figures in themselves are not set up as standards, however, they do establish trends for elevator management to consider, if they wish to operate an effective business firm. Because of unique features in a multiple purpose firm, such as a country elevator, there is some question as to whether any specific cost criteria can be selected as a bench-mark for the trade. Individual differences must first be specified, and then cost boundaries developed. TABLE V Comparative Operational Criteria in Firms with Large Negative or Positive Residuals Salaries Total Volume Invest— Number and Operating of ment of Wages Costs Business per man Employ— $1,000's $1,000's $1,000's _ $1,000's. ees 5 Negative 52.8 77.9 918 6.9 11.6 Residuals Average of all 49.0 88.3 712 5.9 12.6 34 plants 5 Positive 57.4 107.6 640 6.5 13.4 Residuals CHAPTER V Summary and Conclusions In this study of costs and their relationships, an attempt is made to isolate certain meaningful cost relations. Cost data from a sample of thir ty-four Michigan elevator and farm supply firms have been arranged and re-arranged from their original accounting setting for the purpose of examination and analysis. A detailed picture of costs and cost proportions as they exist today in elevator and farm supply firms is developed. The primary objective is to study the relation of costs to a variety of business cost determinants and to attempt to discover by graphical means the actual cost regressions. A second aim is to alert the trade to the more pertinent cost relationships discovered through this study. New areas which need additional research may be opened through the presentation of this analysis. The operating structure of the country elevator and the nature of its activities indicates that the real product of such firms is service. Further, the best measure of this service available with present data is the gross margin obtained by the business. In an operating context three factors are involved in determining a proper business efficiency ratio , unit gross margin times physical volume as the numer- M x V TC ator with total operating costs as the denominator. This study deals almost exclusively with the total costs or some portion of this denomi- nator. Special attention is given to the relationship of costs to service 46. 47. rendered, as measured by gross margin. Four specific cost categories are developed from total cost by combining individual cost items from the plants accounting records. In some cases the individual items were split between two categories, ie. , salaries and wages were divided between labor and recurrent overhead cost in order that management and bookkeeping would not be included as a labor charge. The labor cost category included all plant labor expenses including payroll taxes and commissions. Direct opera- ting expense included those costs which vary in the short run with the volume of business. Recurrent overhead costs contain certain items of expense not directly variable with volume in the short run. Finally, plant maintenance cost represented the cost of maintaining the plant and equipment. Total operating costs are compared graphically to output after adjusting for differences in percent of capacity utilization. Each of the specific costs mentioned above are also related to output by the use of graphic correlation analysis. Output is the computed gross margin of these elevators and percent capacity utilization represents the level of feed and grain equipment usage during a year. The graphic method was used in order that the regressions would take the shape which fitted the relationship. Determination of the nature of the curve or line was one of the objectives of the thesis. The net relationship of total costs to output is a positive linear 48. relation - except for the sloping decline at the low output and the sharp rise at the highest limit. This relationship points to an increasingly advantageous ratio of total cost to output as gross margin increased. However, at the maximum output the costs rise rapidly with no appreciable increase in output. Labor costs are the most important component of total costs. The net regression shows that the labor cost to output decreased in very large plants. Capacity utilization did not affect labor costs materially. Apparently, many of the elevators have been able to develop enough flexibility in their operation that they can adjust to a wide range of feed and grain machinery utilization. Gross sale goals per man probably should climb substantially as volume of sales becomes a more important business necessity. Other cost determinants besides output and capacity utilization play a part in the cost structure and its variances. Several cost factors were developed with the following determinants chosen for study. Percent grain gross income of non-grain gross income . Monthly wage prices (all labor) Gross sales per man Total plant investInent p-FnWNI—I 29/ Comparison of these factors between ten of the plants in the study -- indicated that the most efficient plants (total cost to output) had the high grain volume, lower wage prices, the greatest gross sales per 22/ Five largest positive and negative residual plants by the estimated cost from the actual cost of these plants. 49. man and had approximately one -fourth more invested in plant and machinery. These additional determinants appear to have an effect on the costs of elevators and additional work may be necessary to subscribe their actions and boundaries more concretely. All salaries and wages, including commissions and insurance, and retirement programs were related to total operating cost and total sales volume. Findings indicated that these ratios were not sufficient in themselves for comparative analysis of elevator operations. Addi- tional categorization as to size of business (volume), the investment in plant and facilities, and the product mix would be necessary for these ratios to be helpful in decision making. Evidently the number of men employed to the volume of business and the actual wage price that they command are two ratios that appear to be more meaning- ful. There is a need for continuing research into costs and cost relationships. The efficiency with which labor is used needs close scrutiny on the part of management. There is the problem of invest- ment in machinery and its relation to both total costs and labor expense. Possibly there are meaningful relationships not included in this study which could be useful as a basis for managerial decisions. This study points out some of the complex and challenging conditions which face an elevator manager as he meets the daily responsibilities of manage- ment. These men hold key roles in agriculture, and the necessary 50. research to assist them can provide useful assistance which will be of direct benefit to the business men involved, but at the same time bene- ficial to agriculture in total. APPENDIX 51. a. .. 4'52...i ..-.( Figure XII Population by County in Michigan Country Elevator Lower Peninsula — 1958 C ”A ll. 07$!“ Z ANTWM 5 I I KALKASKA (RA WF'D OSCODA mm. [VEXFORD , 3 4 2 3 msox um escrow cup: ‘LADWIN ARENAC ALCOM 5 4 OCEANA NMYGO MICOS TA ISAEELLA MIDLAND l3 TU.“ OLA SANILAC I 6 9 I 4I3I 5 9 71 5 mamam cur/or SAGINAW 24 2 2 4‘ m” i 19 GENES“ “PH” 0mm loll/.48 CUIH'ON 5m m. 3! cu; l I ll I7 :3 l2 I9 '1... ... ALLEGAII may EATON mama LIVINGST'II 8H Mum. l5 CALHOUN JACKSON 8 WASHYENAW WA 7”! S” an l2 9 SZJOSIPII BANK” IIILLSML! LEMWEI MONROE .1 0 '0113 12 I L. . . «lb lu 0-1219 8” as" 05' TABLE VI 53. Raw Income and Sales Data of the Thirty-four Elevators Studied Plant Grain and All Other Service Total Sales Actual Net No. Feed Sales Sales Income & Service Gross Margin Volume Volume Margin 1 $ 202,000 $ 288,055 $ 8,822 $ 498,878 $ 84,561 $ 2,541 2 261,543 201,493 24,547 487,583 78,001 7,252 3 167,633 163,277 16,052 346,962 55,632 (14,025) 4 139,039 61,809 7,273 208,121 33,073 3,841 5 359,687 507,332 13,529 880,548 134,811 ( 1,494) 6 403,272 215,087 30,840 649,199 115,803 7,052 7 319,626 129,791 24,872 474,289 69,400 2,856 3 468,464 526,015 20,178 1,014,657 173,433 57,721 9 172,243 317,931 15,728 505,902 87,985 7,030 10 132,921 124,477 7,924 265,322 34,193 ( 55) 11 456,383 760,188 14,775 1,231,346 181,067 36,048 12 766,802 323,060 45,608 1,135,470 171,584 53,552 13 620,661 239,706 65,574 925,941 155,269 ( 9,054) 14 163,712 102,423 9,404 275,539 34,722 ( 3,896) 15 238,693 171,570 14,502 424,765 76,142 3,089 16 265,433 167,827 17,322 450,582 71,473 913 17 267,623 132,126 22,719 422,468 65,738 15,075 18 190,505 134,425 11,689 336,619 40,393 ( 4,941) 19 167,733 78,071 12,120 257,924 40,907 3,492 20 243,137 120,609 14,636 378,382 46,753 14,094 21 917,538 647,131 70,527 1,635,196 258,522 24,142 22 358,224 296,390 33,222 687,836 96,409 7,509 23 346,770 350,265 24,129 721,164 102,589 7,438 24 952,135 589,998 26,350 1,568,483 144,109 11,826 25 231,021 92,583 26,309 349,913 54,990 11,115 26 256,962 255,374 25,850 538,186 104,921 19,182 27 434,268 195,099 26,532 655,899 88,246 31,483 28 843,173 168,295 10,157 1,021,625 66,108 2,374 29 1,624,286 770,056 23,363 2,417,705 297,040 86,779 30 449,936 179,255 14,269 643,460 108,473 8,400 31 1,003,842 497,304 25,499 1,526,645 159,978 34,845 32 259,366 69,631 19,594 348,591 54,897 2,972 33 657,873 278,375 9,736 945,984 64,200 5,915 34 440,674 241,022 11,603 693,299 94,034 14,832 Ave.$434,799 $ 276,354 $ 21,9193 733,072 $ 100,157 $ 13,006 54. TABLE VII Cost Data by Category for Elevators Studied Plant Labor Direct Recurrent Plant Total No. Cost giggiating gggihead Iii/iagpée— eggpating 1 $47,858 3: 7,400 $ 15,873 a; 10,889 $ 82,020 2 29,425 17,383 12,473 11,648 70,747 3 31,848 11,216 14,547 12,047 69,658 4 15,875 10,468 6,143 4,428 36,914 5 73,859 21,814 23,693 16,939 136,305 6 45,798 19,769 25,600 16,864 108,031 7 25,906 14,519 12,329 13,790 66,544 8 64,422 17,811 20,531 12,948 115,712 9 35,938 22,739 14,787 7,491 80,955 10 15,152 4,722 10,033 4,341 34,248 11 76,252 27,140 19,454 22,173 145,019 12 60,832 19,812 18,506 18,881 118,032 13 65,564 29,940 34,848 33,871 164,323 14 14,804 8,191 9,644 5,979 38,618 15 38,971 10,191 12,182 11,709 73,053 16 36,084 10,835 10,852 12,789 70,560 17 23,757 12,479 7,816 6,611 50,663 18 17,242 10,581 10,506 7,005 45,334 19 17,412 5,909 8,574 5,520 37,415 20 14,494 7,394 4,942 5,829 32,659 21 101,453 44,428 43,664 44,835 234,830 22 33,680 21,533 15,362 18,325 88,900 23 49,334 19,201 11,714 14,902 95,151 24 56,355 33,383 25,667 16,878 132,283 25 19,941 5,686 10,126 8,572 43,875 26 36,264 14,439 20,723 14,313 85,739 27 26,260 7,038 10,967 12,498 56,763 28 33,570 8,785 11,168 10,211 63,734 29 85,149 44,058 35,158 45,896 210,261 30 40,843 22,314 19,537 17,379 100,073 31 61,525 18,402 22,319 22,887 125,133 32 27,864 8,934 5,889 9.238 51,925 33 25,719 6,067 18,524 8,245 58,285 34 40,461 8,553 15,784 14,404 79,202 .Average$40,861 $ 16,269 $ 16,461 $ 143719 $ 88,300 55. TABLE VIII Basic Data for Total Cost Correlation with Comparison of Estimated to Actual Costs Total Computed Percent Plant Actuals Esti- Plant _ . Operating Gross Capac1ty mated Cost No. Cost - X 1 Income - X1 Utilization - X3 Residuals 1 82,020 72,724 8.4 39 2 70,749 78,767 27.4 68 3 69,658 52,554 15.9 57 4 36,914 30,371 17.9 -16 5 136,305 130,938 17.2 35 6 108,031 103,611 21.8 100 7 66,544 79,366 31.3 57 8 115,712 151,947 28.7 -33 9 80,955 87,571 12.2 79 10 34,248 33,898 6.8 -85 11 145,019 191,291 36.9 5 12 118,032 159,929 40.1 0 13 164,323 156,998 17.8 113 14 38,618 37,796 10.5 58 15 73,053 63,580 20.1 - 7 16 70,560 62,397 12.5 189 17 50,663 66,577 28.0 —36 18 45,334 42,407 11.0 83 19 37,415 39,183 23.7 50 20 32,569 52,994 13.2 -73 21 234,380 260,457 26.7 —14 22 88,900 114,293 11.4 ~85 23 95,151 105,228 13.7 130 24 132,283 159,209 15.1 3 25 43,875 57,168 30.3 5 26 85,739 88,134 17.8 —137 27 56,763 81,821 14.8 -106 28 63,734 85,749 24.0 -121 29 210,261 252,656 24.8 - 3 30 100,073 81,198 20.4 137 31 125,133 141,089 18.9 -139 32 51,925 44,240 18.8 -68 33 58,285 74,241 10.5 -117 34 79,202 87,078 23.4 - 3 .Average 88,300 100,200 19.8 + 5 56. TABLE IX Direct Recurrent Plant Labor Costs Operating Overhead Maintenance Costs Costs Costs Labor Power Taxes Repairs Bonus Office Supplies Bookkeeping Depreciation Commissions Expense Retirement Advertising Management Insurance Expense Social Security Truck Retirement, Rent share of book- keeping and management Unemployment Postage Le gal Insurance Dues Heat Subscriptions Light Inte re s t Freight Meeting Expense Express Board Expense Travel Miscellaneous 10. 11. 57. BIBLIOGRAPHY Bean, Louis H. , A Simplified Method of Graphic Curvilinear Correlation, Journal of American Statistical Association, Vol. 24, December, 1929. Dean, Joel, Managerial Economics, New York: Prentice-Hall, Inc. , Third Printing, 1954. Dean, Joel, and James, Warren R. , The Long Run Behavior of Costs in a Chain of Shoe Stores, University of Chicago Press, Chicago, 1942. Ezekiel, Mordecai, Methods of Correlation Analysis, Edition 2, New York, John Wiley & Sons, 1941. French, B. C., Sammet, L. L. , and Bressler, R. G. , Economic Efficiency in Plant Operations with Special Reference to the Market- ing of California Pears, Hilgardia, Vol. 24, Number 19, July, 1956, University of California, Berkeley, California. Gold, Bela, Foundations of Productivity Analysis, University of Pittsburgh Press, .1955. Knight, Frank, Risk, Uncertainty and Profit, London School of Economics and Political Science, Reprint No. 16, London, 1937. Larzelere, H. E. and King, R. M. , Ratios as Measuring Sticks for Elevator and Farm Supply Organizations, Special Bulletin 380, Agricultural Experiment Station, Michigan State College, August, 1952. National Bureau of Economic Research, Cost Behavior and Price Policy, 1943, Committee on Price Determination, Edward S. Mason, Chairman. Phillips, Richard, Managing for Greater Returns in Country Elevator and Retail Farm Supply Businesses, Des Moines, Iowa, Farmers Grain Dealers Association of Iowa, (Cooperative), 1957. Pursel, Arthur J. , The Use of Functional Analysis in Evaluating the Operations of Michigan Elevator - Farm Supply Businesses, Unpub- lished M.S. Thesis, Michigan State University, 1957. 12. 13. 14. 15. 16. 58. Seymour, Robert G. , Cost Concepts in Marketing: A Study of the Application of Theoretical Concepts of Cost to the Empirical De termination of Cost Behavior in the Individual Marketing Firm, Unpublished Ph.D Thesis, University of Illinois, 1953. Shepherd, Geoffrey S. , Agricultural Price Analysis, Ames, Iowa, The Iowa State College Press, Second Edition, Revised, 1947. Stigler, George J. , The Theory of Price, Revised Edition, 1952, New York, The MacMillan Company. Thomsen, Frederick L. and Foote, Richard J. , Airicultural Prices, New York, 2nd Edition, McGraw-Hill, 1952. Waugh, Frederick V. , Graphic Analysis in Economic Research, Agricultural Handbook, N. 84, USDA,AMS, Washington, D. C. , June, 1955. 59. CONFIDENTIAL CONFIDENTIAL Questionnaire on Elevator Farm Supply Businesses The information asked for on this questionnaire is for research purposes only. It will never be divulged in such a manner that the in- formation can be identified with your business. Name of Business Date Address Post Office County State GENERAL INFORMATION Kind of Ownership Individual proprietor Regular Corporation Cooperative Corporation How large a trade territory do you cover (miles in each direction) East South West North EMPLOYMENT RECORD How many full time Employees do you have exclusive of the manager? How much seasonal hiring did you do last year? Can you give a job classification for each individual you employ as asked for in the table below? If one individual works at two jobs, for ex- ample: if an office employee waits on customers, or if a mill man drives truck part-time, please estimate the time spent on each job as closely as possible. Classification of Jobs by Individuals 60. Employee and Department Feed NO‘U‘lI-FUJNI—n Grain O‘U'IVDWNI—I Truck Drivers U'Irlinr-I Bookkeeping IIIIhUONr-n Other O‘U'er-UONI—I Time Employecf in Months Duties Salary 61. Managers Name . Do you operate on a straight salary or on a salary plus commissions, or a bonus ? What is the basis for payment of commissions or bonuses, if any How much of the salary item in the operating statement of your audit represents a payment to you for management? Do any other employees receive commissions or bonuses? If yes, ex- plain What percent of managers time is spent: 1. Waiting on customers? 2. Buying grain or beans? 3. Doing clerical work? 4. Studying markets, attending meetings, learning about feeding or fertilization practices, studying past operating records, otherwise acquiring information needed for management decisions ? 5. Other activities? FAR M PRODUCTS MAR KETED Ejuantity Cars Cost of Average bought Shipped Sales mark-up taken Beans (navy) Corn Oats Wheat Barley Soybeans Other 62. FARM SUPPLIES SOLD Supplies Units Sales Cost of Mark up Average Sold Sales taken Price Rec'd. Gasoline Tractor Fuel Kerosene 8: Fuel oil Lubrication oil Feed Seed Fertilizer High Low Coal ——_—_—_——————'_ Other Farm Supplies -——————_——__—*_— Receipts Charge Receipts from services rendered: Grain and seed treating and cleaning Grinding and mixing Warehousing (Storage) Trucking MONTHLY STATEMENT OF INVENTORIES AND ACCOUNTS RECEIVABLE Month Accounts Inventories R eceivable January February March April May June July August September October November December Marketing inventories include wheat and other grains, poultry, eggs, etc. Farm supply inventories include feed, seed, fertilizer, farm machinery, miscellaneous farm supplies, etc. 63. BORROWING DURING LAST FISCAL YEAR (List each loan separately) Loan No. 1 2 3 4 5 6 Term of loan in months Source (type of lender) Purpose (oper. , cap. , etc.) Security (Mort. , etc.) Method of repayment Maximum amount outstanding during fiscal year Amount outstanding at close of year Interest rate How much did you owe on trade accounts payable during seasonal peak ope rations ? Spring Fall What is the maximum amount which can borrow on a seasonal basis from banks, patrons, relatives, etc. ? KIND OF ADVERTISING OR FAR MER RELATIONS USED Me thod Frequency Expenditure Newspaper advertising Direct Mail Radio or T.V. Call on Farmers Other Under what conditions in the past two or three years have you been hard pressed for .capital? Could you have increased your volume if you had had additional operating capital this past year? Yes No How much . Explain 64. Which of the plants previously mentioned give you the strongest competition? (Name in order) Uer-UJNI—o .0. O What do these businesses do that cause you trouble? How do you meet this competition? How much government grain did you handle last year? Did you suffer any unusual losses on commodities handled last year? Considering now the amount of business available and your competitive situation what maximum volume of business do you think you ought to have in the trade territory you operate in. Feed Grain Others About right Should increase (How much - in percent) If you feel you should increase - - what has prevented it? 65 How much capital would be needed? How much additional would this bring in? Which phase of your operation do you consider most profitable? Have you aggressively attempted to push it in anyway? How ? Have you held grain for higher prices or bought future contracts through- out the year? Do you pick up or deliver many commodities which you handle ? Item Percent picked up from Percent delivered Others suppliers or farmers To Buyers To Farmers Feed X Fertilizer X X Grain X Petroleum X X Other What percent of your feed volume is from your mixing operation? What percent is from merchandised feeds? What ercent of our feed volume is for P y Average Price for each 1. Poultry kind of feed 2. Dairy cattle 3. Beef cattle 4. Hogs 5. Other 66. What kind of a pricing policy do you have? Other services, Grain Feed Other mixing, clean- Supplies ing, etc. Take supplies or buyers suggested mark-up Try to meet competitors price Base mark-up on est. cost irrespective of competitors Try to beat competitors What community projects does your business sponsor or support? Who has the authority in practice for the following types of problems? Owner Manager Directors 911331: a. Setting prices __.__ b. Pricing feed and supplies __ c. Selecting sales outlet __ (1. Buying major equipment __ e. Hiring employees _— f. Complaints _— How many competitors do you have? Location Kind of Ownership Estimated Total Volume of Sales Grain Other 67. BUILDING AND FIXTURES RECORD Elevator Grain Storage Capacity Bu. Bag Storage Capacity Cost Value of Bldg. Present Book Value Age of Building Mill Bulk Storage Capacity Bag Storage Capacity Cost Value Present Book Value Age of Building Office and R etail Size of Building x ft. Cost Value Present Book Value Age of Building Warehouse No. l Use Capacity Cost Value Present Book Value Age of Building Warehouse No. 2 Use Capacity Cost Value Present Book Value A ge of Building Warehouse No. 3 Use Capacity Co 8 t Value Pre sent Book Value Age of Building_ Other Buildings Other Building 8 Eleva tor or Grain Handling Cost Value EQUIPMENT RECORDS Present Book Value 68. Trucks Average Age Daily Grain Capacity Mill Cost Value Present Book Value Average Age Grinding and mixing capaci ty Office and R etail Cost Value Pre sent Book Value Average Age Warehouse Equipment (Include loading - unloading equipment, such as coal loader Petroleum handling equipment, etc. Co s t Value Present Book Value Othe r E quipment Average Age RENT USE {ii-fill MICHIGAN STATE UNIV. LIBRARIES lllllll llll llflllllllllll Ill llllli llllll II II 9 8 312 30100 5003