Exhibit 9-1
a Farmer Must Decide Whether to Take Protective

question 7

Essay

Exhibit 9-1
A farmer must decide whether to take protective action to limit damage to his grapefruit crop in the event that the overnight temperature falls to a level well below freezing. If the temperature drops too low he runs the risk of losing his entire crop, valued at $75,000. Based on the National Weather Service, the probability of such a temperature drop is 60%. He can insulate his crop by spraying water on all the trees, which will cost $20,000. This action might succeed in protecting the crop, with the following $$\begin{array} { l l } \text { Probability } & \text { Damage } \\0.30 & \$ 0 \\0.15 & \$ 5,000 \\0.10 & \$ 10,000 \\0.15 & \$ 15,000 \\0.30 & \$ 20,000\end{array}$$
-Refer to Exhibit 9-1.Construct a risk profile and from that determine the probability that no additional cost is incurred if the decision to insulate at a cost of $20,000 is made.​​

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Definitions:

Cost Behaviour

The way in which costs change in relation to alterations in an organization's level of activity.

Relevant Range

The range of activity within which the assumptions about fixed costs and variable cost behavior hold true.

Production

The process of creating goods and services through the combination of human labor, materials, and technology.

Cost Estimation

The process of forecasting the costs associated with a project or production, taking into consideration all relevant variables.