Group Title: Research report - Bradenton Agricultural Research & Education Center - GC1976-18
Title: Nursery opportunity costs
Full Citation
Permanent Link: http://ufdc.ufl.edu/UF00067708/00001
 Material Information
Title: Nursery opportunity costs what are they?
Series Title: Bradenton AREC research report
Physical Description: 2 leaves : ; 28 cm.
Language: English
Creator: Otte, John A
Agricultural Research & Education Center (Bradenton, Fla.)
Publisher: Agricultural Research & Education Center, IFAS, University of Florida
Place of Publication: Bradenton Fla
Publication Date: 1976
Subject: Nurseries (Horticulture) -- Costs -- Florida   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
non-fiction   ( marcgt )
Statement of Responsibility: John A. Otte.
General Note: Caption title.
General Note: "December 1976."
Funding: Florida Historical Agriculture and Rural Life
 Record Information
Bibliographic ID: UF00067708
Volume ID: VID00001
Source Institution: Marston Science Library, George A. Smathers Libraries, University of Florida
Holding Location: Florida Agricultural Experiment Station, Florida Cooperative Extension Service, Florida Department of Agriculture and Consumer Services, and the Engineering and Industrial Experiment Station; Institute for Food and Agricultural Services (IFAS), University of Florida
Rights Management: All rights reserved, Board of Trustees of the University of Florida
Resource Identifier: oclc - 72465948

Table of Contents
        Page 1
        Page 2
Full Text


The publications in this collection do
not reflect current scientific knowledge
or recommendations. These texts
represent the historic publishing
record of the Institute for Food and
Agricultural Sciences and should be
used only to trace the historic work of
the Institute and its staff. Current IFAS
research may be found on the
Electronic Data Information Source

site maintained by the Florida
Cooperative Extension Service.

Copyright 2005, Board of Trustees, University
of Florida

IFAS, University of Florida
S-/g Bradenton

Bradenton AREC Research Report GC1976-18 December 1976


John A. Otte

No other hocus pocus performed by economists baffles growers more than
opportunity costs. When estimating costs, economists figure total cash and non-
cash costs just like accountants. They also calculate net nursery income following
standard accounting procedures. Subtracting cash and non-cash costs from total
revenue leaves net nursery income. ,.

Net nursery income is return to scja urL[Y q r yet unpaid. These
include: unpaid operator's and family labor, equity capal and management.
Economists use opportunity costs to determine contribution o these resources to
net nursery income. JAN 7- 1977

Opportunity cost to a resource ks the amount of income acrificed by using
that resource in one production procLfj .Sthb A:ia the 'next best use" for
that resource. Every time a resour ie-'i activity, potential
income that could have been realized by using that res UL in other activities
is foregone, sacrificed, or lost. The amount of income foregone becomes the
opportunity cost for that resource.


Let's say you have $100,000. You can invest your money in: (A) nursery
facilities and growing plants. (B) the bank and get 7% interest; or (C) your
mattress and sleep on it.

Table 1 shows the cost and return allocation used to calculate return to
capital for your nursery.

Your $25,000 net nursery income must be allocated as returns to unpaid labor,
equity capital, and nursery management. First, subtract a $10,000 opportunity
cost for unpaid labor and management. This was calculated by assuming that your
2000 hours of unpaid labor could have earned $5/hour in alternative employment.
Your management is valued at zero. Capital "gets what is left over" after all
other resources have been paid. In this case $15,000.

Table 1. Return Allocation for a Nursery.

$141,350 Gross Receipts
-110,100 Total cash costs
6,250 Depreciation & other non-cash costs
$ 25,000 Net Nursery Income or Return to unpaid operator's labor,
management, and capital
10,000 Opportunity cost on unpaid labor and management (return
unpaid labor could have earned in other employment)
$ 15,000 Return to Capital

JOHN A. OTTE is the Area Extension Farm iManagement Economist at the
Agricultural Research and Education Center in Bradenton, Florida.

Table 2. Returns and Opportunity Costs to Alternative Investments for

Opportunity cost
Investment Return for capital in
each investment

Nursery $15,000 $ 7,000
Bank 7,000 15,000
Mattress 0 15,000

Table 2 shows returns and opportunity costs for the alternative investments
of your $100,000. If you invest in the nursery, what is the opportunity cost on
your capital? Answer $7,000, the income you could have earned in your next best
alternative, the bank. If you 'invest" in either the bank or the mattress, what
is your opportunity cost? Answer in both cases $15,000, the income you could
have earned in your next best alternative, the nursery.

You could choose alternative methods to allocate net nursery income, depending
on which resource you wanted to 'get what was left over.' Table 3 shows one such
alternative method.

Table 3. Alternative returns allocation for a nursery.

$141,350 Gross Receipts
-110,100 Total cash costs
6,250 Depreciation & other non-cash costs

$ 25,000 Net Nursery Income or return to unpaid operator's labor,
management, and capital.
7,000 Opportunity cost on capital (return you could have earned
in bank).
10,000 Opportunity cost on labor (return you could have earned
in other employment).
$ 8,000 Return to management.

Typically economists allocate net nursery income based on opportunity cost to
capital first, opportunity cost to labor second, with management getting what is
left over. Management gets what is left over because return to management in
alternative uses is most difficult to evaluate.

If opportunity costs are subtracted from gross returns to reward different
resources, why can't you deduct them for tax purposes? The question involves
ownership of income generating assets. You own your labor, capital and management.
If you deducted their returns from the nursery business income, these nursery
deductions would be treated as personal income from other sources when you paid
your taxes. You would still be paying taxes on income generated by assets you own.

Using opportunity costs--as confusing as they seem--allows an answer to tough
questions like what is your management worth? Or, what is your capital making?
Finding this out may be the spur that makes you ask if your other inputs are
earning their opportunity costs. Seen thus, opportunity costs are an important
diagnostic tool used by alert managers.

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