This case solution includes the determination of the appropriate weighs for cows for a cow-calf operation. The trend nationally has been that the weights of the cows increase as the produce bigger calves. However, in order to ensure that the cost of the maintenance of a large cow does not exceed the benefits derived from a bigger calf, the economics of it must be analyzed. The case analysis report includes the principles of managerial accounting because of the calculation of the expenses and the divers. That way the company knows how much they need to spend in these areas relate to the different size of cows by calculating these two equations.
First of all, the Old Mule Farm case strategy is cost leadership, they try to minimize the total cost to compete with others.
(Appendix4) Reduce cost(cost leadership) They try to improve efficiency by feeding more forage and dry matter to produce heavier cow, but it increases variable cost. Since they feed cow base on different weight of group, they can save some variable cost such as dry matter cost and forage cost; also they can better allocate idle fee into another useful area.
Therefore, I think the Old Mule Farm should consider to use alternative B which is grouping cows into a group and feed them in a more efficient way. It not only can save variable cost which is consistent with their strategy, but also can best allocate their cash. For example, they can use that money to improve the feeding system or buy some better quality fertilizer and they can have a better quality of forage to feed cows. Moreover, heavier cows don't always produce heavier calves, and since Old Mule Farm is losing money during these years, they don't have enough money to improve their operating environment, and it's not easy for them to approach the bank for a loan; therefore, they should find some ways to cut variable cost as possible as they can, and try to earn profit.
4. In order to use this alternative, they first need to weight each cow, and then indicate the average weight of the groups of cows they have; you calculate the amount of forage you need according to historical data (Ex.5, and Ex.6).
5. (a)From Ex1, we know the Old Mule Farm had fixed cost: $11307 in 2008 and their variable cost is $24859.09, and the revenue per unit is $650.81 (Ex2); also, they had 50 cows in their company, so per unit variable cost is 24859.09/50=$497.18. Use equation: P *Q= Fixed cost + 497.18 * Q + Profit; profit is zero, so the Q= 74 (b) if the calves price increase to 127.75 ($/cwt), and other conditions stay the same, the sale price per cow is 127.75/100*602.6=769.82 (we know the average weaning weight of calves in 2008 was 602.6 pounds). Therefore the profit= P*Q-Fixed cost-variable cost=769.82*50-1130750*497.18=$2325. (c) If the calves price increase to 127.75 ($/cwt), other factors remain unchanged, then the breakeven point Q=11307/ (769.82-497) =42. (d) If Old Mule Farm wants to be profitable when they only have 50 cows each year, then their selling price should be at least $723. 32 (50*P=11307+24859.09, P=36166.09/50). Appendix 2: Cost estimate
Appendix 4: Assume all the condition stay the same except cow price. As shown in Ex 4, the average cow weight is 1200, and the average calfweaning weigh is 613, and the calves sale price ($/cwt) unchanged, so 108/100*613=$662.04, which is generating 11.23 $/lbs per cow revenue.
1. What is the appropriate cow size for the herd using the 50% weaning rule? Compare the value of a calf to the cost of maintaining the cow as an alternative means of determining appropriate cow size.
2. Which method (50% weaning rule or marginal analysis) do you think provides the best measure?
3. What are the drivers in a cow-calf operation? Is the revenue-expense calculation (see Exhibit 2) clear regarding drivers? Why or why not?
4. How would you change the detailed statement of revenues and costs so that it provides information that would help Green make her decision?
5. To what extent is the Greens’ confusion a result of the failure of the accounting system?
6. How would the results of Old Mule Farms’ operations change if revenues or expenses were allocated in a different manner?