PURCHASING POWER 



587 



Depreciation takes place on the trees after they have 

 reached maturity as well as on the buildings and equipmento 

 Conservative rates for estimating these costs are: 



Trees: 3-8 percent, depending on the kind of fruit and the 

 probable length of profitable bearing. 



Buildings: 3-5 percent, computed on cost. 

 Equipment: 10 percent, computed on cost. 



While these costs may not necessarily represent an equiva- 

 lent outlay of cash, they must be considered if a fair estimate 

 of the net income from the enterprise is to be obtained. Re- 

 member that interest on investment represents only a fair 

 return on capital if it were placed in some other business. It 

 is intended that charges made for depreciation will, over the 

 estimated period of useful life, equal the original cost of the 

 item. It is not fair to consider the purchase of a sprayer as 

 an expense of the year purchased, and neither is it just to 

 consider it an expense of the year when it is discarded. The 

 cost can be allocated fairly only over the period of actual use. 



Taxes and insurance, in contrast to interest and deprecia- 

 tion, represent actual outlays of cash. Neither shows any 

 short-run relationship to the commodity sold. 



The bulk of the variable expenses assumed by the orchard- 

 ist each year relate to labor, fertilizer and spray materials, 

 and marketing supplies. Each requires an actual cash outlay. 

 There is a minimum of expenses below which no orchard can 

 be kept in condition. It is difficult to determine how much 

 should be paid out for these items without knowing what the 

 returns will be. It is not good business to spend more on 

 packaging the fruit than can be expected in return. On the 

 other hand, the long-run value of turning out a top pack of 

 fruit and building a reputation thereby may serve to repay 

 the grower many fold for a large initial outlay. 



Purchasing Power. The fruit farmer, like any business 

 man who is engaged in the production of products for resale, 

 can be financially successful only when the relationship be- 



