A dairy farmer has a 50-cow herd housed in a barn. He is interested in expansion...

 

Transcribed Image Text:

A dairy farmer has a 50-cow herd housed in a barn. He is interested in expansion and needs to decide whether he should abandon his present facilities with result in salvage value and build a new free stall and milking parlour systems, or whether he should expand his existing system. Because of the flexibility of other enterprises on the farm, he can make available whatever labour is required. The daily labour requirements for each 10 cows is 1.6 manhours for the barn and 1.2 manhours for the free stall system. Labour costs K32.50/hour. The free stall will result in lower temperatures and the extra cost of feed is K8000/year. The existing barn cost K5000/cow to construct. The milk and manure equipment cost K121,500.00 The additional construction will cost K13,500.00/cow. Cost of constructing a new free stall costs K10,000.00/cow The milking palour and associated equipment will cost K139,250.00. Manure and milking equipment costs K30,000.00 The farmer needs to expand to 100 cows. The following rates are to be used in the analysis. Depreciation 5% of total cost Interest 3% of total cost ● R&M costs = 2% of total cost 2% of total cost Taxes Insurance ● 1% of total cost On the basis of benefit/cost ratio, which of the two is a better option: EITHER expand his existing system OR abandon his present facilities and build a new free stall and milking parlour systems NB: The income from the 100 cows in both cases is the same and all other operating costs (other than labour) are also the same. ● ● = = A dairy farmer has a 50-cow herd housed in a barn. He is interested in expansion and needs to decide whether he should abandon his present facilities with result in salvage value and build a new free stall and milking parlour systems, or whether he should expand his existing system. Because of the flexibility of other enterprises on the farm, he can make available whatever labour is required. The daily labour requirements for each 10 cows is 1.6 manhours for the barn and 1.2 manhours for the free stall system. Labour costs K32.50/hour. The free stall will result in lower temperatures and the extra cost of feed is K8000/year. The existing barn cost K5000/cow to construct. The milk and manure equipment cost K121,500.00 The additional construction will cost K13,500.00/cow. Cost of constructing a new free stall costs K10,000.00/cow The milking palour and associated equipment will cost K139,250.00. Manure and milking equipment costs K30,000.00 The farmer needs to expand to 100 cows. The following rates are to be used in the analysis. Depreciation 5% of total cost Interest 3% of total cost ● R&M costs = 2% of total cost 2% of total cost Taxes Insurance ● 1% of total cost On the basis of benefit/cost ratio, which of the two is a better option: EITHER expand his existing system OR abandon his present facilities and build a new free stall and milking parlour systems NB: The income from the 100 cows in both cases is the same and all other operating costs (other than labour) are also the same. ● ● = =

Answer rating: 100% (QA)

SOLUTION To compare the two options we need to calculate the present value of the costs and benefits ... View the full answer