1: Analyze various expenses into fixed cost, variable cost, and initial investment. Question 2: Find the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1: Analyze various expenses into fixed cost, variable cost, and initial investment. Question 2: Find the breakeven point and plot a CVP graph. Question 3: How do volumes affect the return on equity? Question 4: What advice can be given to the owners. REVENUES Revenue from this project would come from renting the goats. McCoy did not have experience renting out goats, but he believed he could earn a profit at a rental fee per day of US$15. Since he was the only bidder, McCoy realized he could raise the fee if his calculations revealed that the project would be unprofitable. McCoy had to determine how many goats were necessary and how long they would be on site. Since the trailer held up to 25 goats, McCoy decided he would transport the maximum number of goats to the job, pricing each job on the basis of 25 goats per day. The number of calendar days on a job would vary according to the size of the site. McCoy had to determine how much the goats would eat to adequately estimate the time for this project. The amount of forage goats would eat actually depended on the density and type of vegetation. A goat in a pasture would eat about 250 square feet of forage daily, but McCoy had no idea how much they could eat on a wild hillside. He decided to use 250 square feet as the numerical amount in his calculations, declaring it the forage square feet per goat. In his formula, the site area, the number of goats and the forage square feet per goat determined the number of calendar days the goats would spend on site. At 360 feet by 121 feet, the proposed property was an acre in size. Once he determined the number of calendar days spent on site, McCoy could calculate revenue from the proposed project as a function of the number of goats, the rental fee per day and the number of calendar days. Due to difficulties loading and unloading the goats, McCoy decided to bill for a full day even when the job required only a portion of a day. If a job took three and a half days to complete, the client would be billed for four full days. EXPENSES McCoy identified four categories of expenses for the project: set-up costs, fencing costs, shepherd and dog costs, and transportation costs. Set-up McCoy realized he would incur some costs prior to transporting the goats to the job site. Goats require a covered area (goats do not like to get wet), water, a mineral lick and other supplies while grazing. When the job was complete, these facilities would need to be removed and transported back to McCoy's farm. McCoy estimated these costs, which he called set-up costs, at approximately US$100. Fencing Goats tend to disperse when foraging, so it is difficult to keep them in one location. Enclosing the site served two purposes: it kept the goats within a confined area and provided some protection against predators, including bobcats, coyotes, bears and even domestic dogs. McCoy investigated various fences and discovered he could obtain vinyl fence for USS0.75 per linear foot, fully installed. The fence would be installed around the perimeter of the site, so fencing costs depended on site perimeter and fencing cost per linear foot. The vinyl fence was not reusable; McCoy would deliver it to a local recycle center when the job was complete. Shepherd and Dog A shepherd would transport the goats to and from the site. With the aid of a dog, the shepherd would also tend to the goats on site. McCoy determined 10 hours of compensation would cover the shepherd's time, including driving and tending to the goats. He found a local farmhand to take care of the goats on an as- needed basis. The farmhand was willing to accept US$190 per day to tend the goats. Shepherd and dog costs were determined by the number of calendar days and shepherd and dog rate per calendar day, fixed at USS190. Transportation McCoy already had a trailer that he could use for transporting goats, but using it more intensively would lead to increased maintenance on the trailer. Transporting the goats to the site and back would also require a truck with its own fuel and increased maintenance costs. McCoy believed USS0.63 per mile sufficient to cover the fuel cost and increased maintenance for both vehicles. McCoy would limit his transportation costs by making only one round trip each day with a fully loaded trailer of 25 goats. The proposed site was 40 miles from McCoy's farm in Soddy-Daisy, and would require two trips – one to the site and one return – each day. Overall, there were four aspects of transportation costs: rate per mile and miles to site, trips per day (limited to two) and number of calendar days. ANALYZING THE DECISION McCoy was reasonably certain if his goats performed satisfactorily on this project, the property owner would invite him to clear other portions of the property. Other property owners might learn of the success and invite McCoy to bid on clearing their properties as well. McCoy believed this could add significant value to his business, representing an important profit opportunity. McCoy did not want to limit his perspective to only this project. He decided to build a model to change any of the inputs, such as site dimensions, cost of fencing and miles to the site. The model could help him determine the profitability of each project based on the estimated total revenues, total variable costs and total fixed costs. With all of these thoughts, McCoy sat down at the table with paper, pencil and a computer with a blank spreadsheet open before him. He was ready to formulate the model to tell him whether he could make a profit on this project; one he could use to price future projects. McCoy needed to classify costs as either fixed or variable and incorporate these cost behaviors into his model. He realized a number of factors affected total costs, but he hoped the model could identify these factors. Exhibit 1 INCOME STATEMENT, 2010 per doe per herd of 100 does Revenues Milk sales 545.60 54,560.00 Other revenues 49.06 4.906.00 Total revenues 594.66 59,466.00 Variable costs Forage 99.00 9,900.00 Grain mixture 126.23 12,622.50 Milk for replacements 49.50 4,950.00 Supplies 13.20 1,320.00 Veterinary fees / medicine 24.20 2,420.00 Bedding 11.55 1,155.00 Fuel 5.48 547.80 Utilities 15.40 1,540.00 Repairs & other costs 11.00 1,100.00 Labor 148.50 14.850.00 Total direct costs 504.05 50,405.30 Contribution margin 90.61 9,060.70 Fixed costs Milking equipment depreciation 1,980.00 Housing barn depreciation 594.00 Machinery depreciation 357.50 Replacement livestock 2.838.00 5,769.50 Taxable income 3,291.20 1: Analyze various expenses into fixed cost, variable cost, and initial investment. Question 2: Find the breakeven point and plot a CVP graph. Question 3: How do volumes affect the return on equity? Question 4: What advice can be given to the owners. REVENUES Revenue from this project would come from renting the goats. McCoy did not have experience renting out goats, but he believed he could earn a profit at a rental fee per day of US$15. Since he was the only bidder, McCoy realized he could raise the fee if his calculations revealed that the project would be unprofitable. McCoy had to determine how many goats were necessary and how long they would be on site. Since the trailer held up to 25 goats, McCoy decided he would transport the maximum number of goats to the job, pricing each job on the basis of 25 goats per day. The number of calendar days on a job would vary according to the size of the site. McCoy had to determine how much the goats would eat to adequately estimate the time for this project. The amount of forage goats would eat actually depended on the density and type of vegetation. A goat in a pasture would eat about 250 square feet of forage daily, but McCoy had no idea how much they could eat on a wild hillside. He decided to use 250 square feet as the numerical amount in his calculations, declaring it the forage square feet per goat. In his formula, the site area, the number of goats and the forage square feet per goat determined the number of calendar days the goats would spend on site. At 360 feet by 121 feet, the proposed property was an acre in size. Once he determined the number of calendar days spent on site, McCoy could calculate revenue from the proposed project as a function of the number of goats, the rental fee per day and the number of calendar days. Due to difficulties loading and unloading the goats, McCoy decided to bill for a full day even when the job required only a portion of a day. If a job took three and a half days to complete, the client would be billed for four full days. EXPENSES McCoy identified four categories of expenses for the project: set-up costs, fencing costs, shepherd and dog costs, and transportation costs. Set-up McCoy realized he would incur some costs prior to transporting the goats to the job site. Goats require a covered area (goats do not like to get wet), water, a mineral lick and other supplies while grazing. When the job was complete, these facilities would need to be removed and transported back to McCoy's farm. McCoy estimated these costs, which he called set-up costs, at approximately US$100. Fencing Goats tend to disperse when foraging, so it is difficult to keep them in one location. Enclosing the site served two purposes: it kept the goats within a confined area and provided some protection against predators, including bobcats, coyotes, bears and even domestic dogs. McCoy investigated various fences and discovered he could obtain vinyl fence for USS0.75 per linear foot, fully installed. The fence would be installed around the perimeter of the site, so fencing costs depended on site perimeter and fencing cost per linear foot. The vinyl fence was not reusable; McCoy would deliver it to a local recycle center when the job was complete. Shepherd and Dog A shepherd would transport the goats to and from the site. With the aid of a dog, the shepherd would also tend to the goats on site. McCoy determined 10 hours of compensation would cover the shepherd's time, including driving and tending to the goats. He found a local farmhand to take care of the goats on an as- needed basis. The farmhand was willing to accept US$190 per day to tend the goats. Shepherd and dog costs were determined by the number of calendar days and shepherd and dog rate per calendar day, fixed at USS190. Transportation McCoy already had a trailer that he could use for transporting goats, but using it more intensively would lead to increased maintenance on the trailer. Transporting the goats to the site and back would also require a truck with its own fuel and increased maintenance costs. McCoy believed USS0.63 per mile sufficient to cover the fuel cost and increased maintenance for both vehicles. McCoy would limit his transportation costs by making only one round trip each day with a fully loaded trailer of 25 goats. The proposed site was 40 miles from McCoy's farm in Soddy-Daisy, and would require two trips – one to the site and one return – each day. Overall, there were four aspects of transportation costs: rate per mile and miles to site, trips per day (limited to two) and number of calendar days. ANALYZING THE DECISION McCoy was reasonably certain if his goats performed satisfactorily on this project, the property owner would invite him to clear other portions of the property. Other property owners might learn of the success and invite McCoy to bid on clearing their properties as well. McCoy believed this could add significant value to his business, representing an important profit opportunity. McCoy did not want to limit his perspective to only this project. He decided to build a model to change any of the inputs, such as site dimensions, cost of fencing and miles to the site. The model could help him determine the profitability of each project based on the estimated total revenues, total variable costs and total fixed costs. With all of these thoughts, McCoy sat down at the table with paper, pencil and a computer with a blank spreadsheet open before him. He was ready to formulate the model to tell him whether he could make a profit on this project; one he could use to price future projects. McCoy needed to classify costs as either fixed or variable and incorporate these cost behaviors into his model. He realized a number of factors affected total costs, but he hoped the model could identify these factors. Exhibit 1 INCOME STATEMENT, 2010 per doe per herd of 100 does Revenues Milk sales 545.60 54,560.00 Other revenues 49.06 4.906.00 Total revenues 594.66 59,466.00 Variable costs Forage 99.00 9,900.00 Grain mixture 126.23 12,622.50 Milk for replacements 49.50 4,950.00 Supplies 13.20 1,320.00 Veterinary fees / medicine 24.20 2,420.00 Bedding 11.55 1,155.00 Fuel 5.48 547.80 Utilities 15.40 1,540.00 Repairs & other costs 11.00 1,100.00 Labor 148.50 14.850.00 Total direct costs 504.05 50,405.30 Contribution margin 90.61 9,060.70 Fixed costs Milking equipment depreciation 1,980.00 Housing barn depreciation 594.00 Machinery depreciation 357.50 Replacement livestock 2.838.00 5,769.50 Taxable income 3,291.20 1: Analyze various expenses into fixed cost, variable cost, and initial investment. Question 2: Find the breakeven point and plot a CVP graph. Question 3: How do volumes affect the return on equity? Question 4: What advice can be given to the owners. REVENUES Revenue from this project would come from renting the goats. McCoy did not have experience renting out goats, but he believed he could earn a profit at a rental fee per day of US$15. Since he was the only bidder, McCoy realized he could raise the fee if his calculations revealed that the project would be unprofitable. McCoy had to determine how many goats were necessary and how long they would be on site. Since the trailer held up to 25 goats, McCoy decided he would transport the maximum number of goats to the job, pricing each job on the basis of 25 goats per day. The number of calendar days on a job would vary according to the size of the site. McCoy had to determine how much the goats would eat to adequately estimate the time for this project. The amount of forage goats would eat actually depended on the density and type of vegetation. A goat in a pasture would eat about 250 square feet of forage daily, but McCoy had no idea how much they could eat on a wild hillside. He decided to use 250 square feet as the numerical amount in his calculations, declaring it the forage square feet per goat. In his formula, the site area, the number of goats and the forage square feet per goat determined the number of calendar days the goats would spend on site. At 360 feet by 121 feet, the proposed property was an acre in size. Once he determined the number of calendar days spent on site, McCoy could calculate revenue from the proposed project as a function of the number of goats, the rental fee per day and the number of calendar days. Due to difficulties loading and unloading the goats, McCoy decided to bill for a full day even when the job required only a portion of a day. If a job took three and a half days to complete, the client would be billed for four full days. EXPENSES McCoy identified four categories of expenses for the project: set-up costs, fencing costs, shepherd and dog costs, and transportation costs. Set-up McCoy realized he would incur some costs prior to transporting the goats to the job site. Goats require a covered area (goats do not like to get wet), water, a mineral lick and other supplies while grazing. When the job was complete, these facilities would need to be removed and transported back to McCoy's farm. McCoy estimated these costs, which he called set-up costs, at approximately US$100. Fencing Goats tend to disperse when foraging, so it is difficult to keep them in one location. Enclosing the site served two purposes: it kept the goats within a confined area and provided some protection against predators, including bobcats, coyotes, bears and even domestic dogs. McCoy investigated various fences and discovered he could obtain vinyl fence for USS0.75 per linear foot, fully installed. The fence would be installed around the perimeter of the site, so fencing costs depended on site perimeter and fencing cost per linear foot. The vinyl fence was not reusable; McCoy would deliver it to a local recycle center when the job was complete. Shepherd and Dog A shepherd would transport the goats to and from the site. With the aid of a dog, the shepherd would also tend to the goats on site. McCoy determined 10 hours of compensation would cover the shepherd's time, including driving and tending to the goats. He found a local farmhand to take care of the goats on an as- needed basis. The farmhand was willing to accept US$190 per day to tend the goats. Shepherd and dog costs were determined by the number of calendar days and shepherd and dog rate per calendar day, fixed at USS190. Transportation McCoy already had a trailer that he could use for transporting goats, but using it more intensively would lead to increased maintenance on the trailer. Transporting the goats to the site and back would also require a truck with its own fuel and increased maintenance costs. McCoy believed USS0.63 per mile sufficient to cover the fuel cost and increased maintenance for both vehicles. McCoy would limit his transportation costs by making only one round trip each day with a fully loaded trailer of 25 goats. The proposed site was 40 miles from McCoy's farm in Soddy-Daisy, and would require two trips – one to the site and one return – each day. Overall, there were four aspects of transportation costs: rate per mile and miles to site, trips per day (limited to two) and number of calendar days. ANALYZING THE DECISION McCoy was reasonably certain if his goats performed satisfactorily on this project, the property owner would invite him to clear other portions of the property. Other property owners might learn of the success and invite McCoy to bid on clearing their properties as well. McCoy believed this could add significant value to his business, representing an important profit opportunity. McCoy did not want to limit his perspective to only this project. He decided to build a model to change any of the inputs, such as site dimensions, cost of fencing and miles to the site. The model could help him determine the profitability of each project based on the estimated total revenues, total variable costs and total fixed costs. With all of these thoughts, McCoy sat down at the table with paper, pencil and a computer with a blank spreadsheet open before him. He was ready to formulate the model to tell him whether he could make a profit on this project; one he could use to price future projects. McCoy needed to classify costs as either fixed or variable and incorporate these cost behaviors into his model. He realized a number of factors affected total costs, but he hoped the model could identify these factors. Exhibit 1 INCOME STATEMENT, 2010 per doe per herd of 100 does Revenues Milk sales 545.60 54,560.00 Other revenues 49.06 4.906.00 Total revenues 594.66 59,466.00 Variable costs Forage 99.00 9,900.00 Grain mixture 126.23 12,622.50 Milk for replacements 49.50 4,950.00 Supplies 13.20 1,320.00 Veterinary fees / medicine 24.20 2,420.00 Bedding 11.55 1,155.00 Fuel 5.48 547.80 Utilities 15.40 1,540.00 Repairs & other costs 11.00 1,100.00 Labor 148.50 14.850.00 Total direct costs 504.05 50,405.30 Contribution margin 90.61 9,060.70 Fixed costs Milking equipment depreciation 1,980.00 Housing barn depreciation 594.00 Machinery depreciation 357.50 Replacement livestock 2.838.00 5,769.50 Taxable income 3,291.20 1: Analyze various expenses into fixed cost, variable cost, and initial investment. Question 2: Find the breakeven point and plot a CVP graph. Question 3: How do volumes affect the return on equity? Question 4: What advice can be given to the owners. REVENUES Revenue from this project would come from renting the goats. McCoy did not have experience renting out goats, but he believed he could earn a profit at a rental fee per day of US$15. Since he was the only bidder, McCoy realized he could raise the fee if his calculations revealed that the project would be unprofitable. McCoy had to determine how many goats were necessary and how long they would be on site. Since the trailer held up to 25 goats, McCoy decided he would transport the maximum number of goats to the job, pricing each job on the basis of 25 goats per day. The number of calendar days on a job would vary according to the size of the site. McCoy had to determine how much the goats would eat to adequately estimate the time for this project. The amount of forage goats would eat actually depended on the density and type of vegetation. A goat in a pasture would eat about 250 square feet of forage daily, but McCoy had no idea how much they could eat on a wild hillside. He decided to use 250 square feet as the numerical amount in his calculations, declaring it the forage square feet per goat. In his formula, the site area, the number of goats and the forage square feet per goat determined the number of calendar days the goats would spend on site. At 360 feet by 121 feet, the proposed property was an acre in size. Once he determined the number of calendar days spent on site, McCoy could calculate revenue from the proposed project as a function of the number of goats, the rental fee per day and the number of calendar days. Due to difficulties loading and unloading the goats, McCoy decided to bill for a full day even when the job required only a portion of a day. If a job took three and a half days to complete, the client would be billed for four full days. EXPENSES McCoy identified four categories of expenses for the project: set-up costs, fencing costs, shepherd and dog costs, and transportation costs. Set-up McCoy realized he would incur some costs prior to transporting the goats to the job site. Goats require a covered area (goats do not like to get wet), water, a mineral lick and other supplies while grazing. When the job was complete, these facilities would need to be removed and transported back to McCoy's farm. McCoy estimated these costs, which he called set-up costs, at approximately US$100. Fencing Goats tend to disperse when foraging, so it is difficult to keep them in one location. Enclosing the site served two purposes: it kept the goats within a confined area and provided some protection against predators, including bobcats, coyotes, bears and even domestic dogs. McCoy investigated various fences and discovered he could obtain vinyl fence for USS0.75 per linear foot, fully installed. The fence would be installed around the perimeter of the site, so fencing costs depended on site perimeter and fencing cost per linear foot. The vinyl fence was not reusable; McCoy would deliver it to a local recycle center when the job was complete. Shepherd and Dog A shepherd would transport the goats to and from the site. With the aid of a dog, the shepherd would also tend to the goats on site. McCoy determined 10 hours of compensation would cover the shepherd's time, including driving and tending to the goats. He found a local farmhand to take care of the goats on an as- needed basis. The farmhand was willing to accept US$190 per day to tend the goats. Shepherd and dog costs were determined by the number of calendar days and shepherd and dog rate per calendar day, fixed at USS190. Transportation McCoy already had a trailer that he could use for transporting goats, but using it more intensively would lead to increased maintenance on the trailer. Transporting the goats to the site and back would also require a truck with its own fuel and increased maintenance costs. McCoy believed USS0.63 per mile sufficient to cover the fuel cost and increased maintenance for both vehicles. McCoy would limit his transportation costs by making only one round trip each day with a fully loaded trailer of 25 goats. The proposed site was 40 miles from McCoy's farm in Soddy-Daisy, and would require two trips – one to the site and one return – each day. Overall, there were four aspects of transportation costs: rate per mile and miles to site, trips per day (limited to two) and number of calendar days. ANALYZING THE DECISION McCoy was reasonably certain if his goats performed satisfactorily on this project, the property owner would invite him to clear other portions of the property. Other property owners might learn of the success and invite McCoy to bid on clearing their properties as well. McCoy believed this could add significant value to his business, representing an important profit opportunity. McCoy did not want to limit his perspective to only this project. He decided to build a model to change any of the inputs, such as site dimensions, cost of fencing and miles to the site. The model could help him determine the profitability of each project based on the estimated total revenues, total variable costs and total fixed costs. With all of these thoughts, McCoy sat down at the table with paper, pencil and a computer with a blank spreadsheet open before him. He was ready to formulate the model to tell him whether he could make a profit on this project; one he could use to price future projects. McCoy needed to classify costs as either fixed or variable and incorporate these cost behaviors into his model. He realized a number of factors affected total costs, but he hoped the model could identify these factors. Exhibit 1 INCOME STATEMENT, 2010 per doe per herd of 100 does Revenues Milk sales 545.60 54,560.00 Other revenues 49.06 4.906.00 Total revenues 594.66 59,466.00 Variable costs Forage 99.00 9,900.00 Grain mixture 126.23 12,622.50 Milk for replacements 49.50 4,950.00 Supplies 13.20 1,320.00 Veterinary fees / medicine 24.20 2,420.00 Bedding 11.55 1,155.00 Fuel 5.48 547.80 Utilities 15.40 1,540.00 Repairs & other costs 11.00 1,100.00 Labor 148.50 14.850.00 Total direct costs 504.05 50,405.30 Contribution margin 90.61 9,060.70 Fixed costs Milking equipment depreciation 1,980.00 Housing barn depreciation 594.00 Machinery depreciation 357.50 Replacement livestock 2.838.00 5,769.50 Taxable income 3,291.20 1: Analyze various expenses into fixed cost, variable cost, and initial investment. Question 2: Find the breakeven point and plot a CVP graph. Question 3: How do volumes affect the return on equity? Question 4: What advice can be given to the owners. REVENUES Revenue from this project would come from renting the goats. McCoy did not have experience renting out goats, but he believed he could earn a profit at a rental fee per day of US$15. Since he was the only bidder, McCoy realized he could raise the fee if his calculations revealed that the project would be unprofitable. McCoy had to determine how many goats were necessary and how long they would be on site. Since the trailer held up to 25 goats, McCoy decided he would transport the maximum number of goats to the job, pricing each job on the basis of 25 goats per day. The number of calendar days on a job would vary according to the size of the site. McCoy had to determine how much the goats would eat to adequately estimate the time for this project. The amount of forage goats would eat actually depended on the density and type of vegetation. A goat in a pasture would eat about 250 square feet of forage daily, but McCoy had no idea how much they could eat on a wild hillside. He decided to use 250 square feet as the numerical amount in his calculations, declaring it the forage square feet per goat. In his formula, the site area, the number of goats and the forage square feet per goat determined the number of calendar days the goats would spend on site. At 360 feet by 121 feet, the proposed property was an acre in size. Once he determined the number of calendar days spent on site, McCoy could calculate revenue from the proposed project as a function of the number of goats, the rental fee per day and the number of calendar days. Due to difficulties loading and unloading the goats, McCoy decided to bill for a full day even when the job required only a portion of a day. If a job took three and a half days to complete, the client would be billed for four full days. EXPENSES McCoy identified four categories of expenses for the project: set-up costs, fencing costs, shepherd and dog costs, and transportation costs. Set-up McCoy realized he would incur some costs prior to transporting the goats to the job site. Goats require a covered area (goats do not like to get wet), water, a mineral lick and other supplies while grazing. When the job was complete, these facilities would need to be removed and transported back to McCoy's farm. McCoy estimated these costs, which he called set-up costs, at approximately US$100. Fencing Goats tend to disperse when foraging, so it is difficult to keep them in one location. Enclosing the site served two purposes: it kept the goats within a confined area and provided some protection against predators, including bobcats, coyotes, bears and even domestic dogs. McCoy investigated various fences and discovered he could obtain vinyl fence for USS0.75 per linear foot, fully installed. The fence would be installed around the perimeter of the site, so fencing costs depended on site perimeter and fencing cost per linear foot. The vinyl fence was not reusable; McCoy would deliver it to a local recycle center when the job was complete. Shepherd and Dog A shepherd would transport the goats to and from the site. With the aid of a dog, the shepherd would also tend to the goats on site. McCoy determined 10 hours of compensation would cover the shepherd's time, including driving and tending to the goats. He found a local farmhand to take care of the goats on an as- needed basis. The farmhand was willing to accept US$190 per day to tend the goats. Shepherd and dog costs were determined by the number of calendar days and shepherd and dog rate per calendar day, fixed at USS190. Transportation McCoy already had a trailer that he could use for transporting goats, but using it more intensively would lead to increased maintenance on the trailer. Transporting the goats to the site and back would also require a truck with its own fuel and increased maintenance costs. McCoy believed USS0.63 per mile sufficient to cover the fuel cost and increased maintenance for both vehicles. McCoy would limit his transportation costs by making only one round trip each day with a fully loaded trailer of 25 goats. The proposed site was 40 miles from McCoy's farm in Soddy-Daisy, and would require two trips – one to the site and one return – each day. Overall, there were four aspects of transportation costs: rate per mile and miles to site, trips per day (limited to two) and number of calendar days. ANALYZING THE DECISION McCoy was reasonably certain if his goats performed satisfactorily on this project, the property owner would invite him to clear other portions of the property. Other property owners might learn of the success and invite McCoy to bid on clearing their properties as well. McCoy believed this could add significant value to his business, representing an important profit opportunity. McCoy did not want to limit his perspective to only this project. He decided to build a model to change any of the inputs, such as site dimensions, cost of fencing and miles to the site. The model could help him determine the profitability of each project based on the estimated total revenues, total variable costs and total fixed costs. With all of these thoughts, McCoy sat down at the table with paper, pencil and a computer with a blank spreadsheet open before him. He was ready to formulate the model to tell him whether he could make a profit on this project; one he could use to price future projects. McCoy needed to classify costs as either fixed or variable and incorporate these cost behaviors into his model. He realized a number of factors affected total costs, but he hoped the model could identify these factors. Exhibit 1 INCOME STATEMENT, 2010 per doe per herd of 100 does Revenues Milk sales 545.60 54,560.00 Other revenues 49.06 4.906.00 Total revenues 594.66 59,466.00 Variable costs Forage 99.00 9,900.00 Grain mixture 126.23 12,622.50 Milk for replacements 49.50 4,950.00 Supplies 13.20 1,320.00 Veterinary fees / medicine 24.20 2,420.00 Bedding 11.55 1,155.00 Fuel 5.48 547.80 Utilities 15.40 1,540.00 Repairs & other costs 11.00 1,100.00 Labor 148.50 14.850.00 Total direct costs 504.05 50,405.30 Contribution margin 90.61 9,060.70 Fixed costs Milking equipment depreciation 1,980.00 Housing barn depreciation 594.00 Machinery depreciation 357.50 Replacement livestock 2.838.00 5,769.50 Taxable income 3,291.20 1: Analyze various expenses into fixed cost, variable cost, and initial investment. Question 2: Find the breakeven point and plot a CVP graph. Question 3: How do volumes affect the return on equity? Question 4: What advice can be given to the owners. REVENUES Revenue from this project would come from renting the goats. McCoy did not have experience renting out goats, but he believed he could earn a profit at a rental fee per day of US$15. Since he was the only bidder, McCoy realized he could raise the fee if his calculations revealed that the project would be unprofitable. McCoy had to determine how many goats were necessary and how long they would be on site. Since the trailer held up to 25 goats, McCoy decided he would transport the maximum number of goats to the job, pricing each job on the basis of 25 goats per day. The number of calendar days on a job would vary according to the size of the site. McCoy had to determine how much the goats would eat to adequately estimate the time for this project. The amount of forage goats would eat actually depended on the density and type of vegetation. A goat in a pasture would eat about 250 square feet of forage daily, but McCoy had no idea how much they could eat on a wild hillside. He decided to use 250 square feet as the numerical amount in his calculations, declaring it the forage square feet per goat. In his formula, the site area, the number of goats and the forage square feet per goat determined the number of calendar days the goats would spend on site. At 360 feet by 121 feet, the proposed property was an acre in size. Once he determined the number of calendar days spent on site, McCoy could calculate revenue from the proposed project as a function of the number of goats, the rental fee per day and the number of calendar days. Due to difficulties loading and unloading the goats, McCoy decided to bill for a full day even when the job required only a portion of a day. If a job took three and a half days to complete, the client would be billed for four full days. EXPENSES McCoy identified four categories of expenses for the project: set-up costs, fencing costs, shepherd and dog costs, and transportation costs. Set-up McCoy realized he would incur some costs prior to transporting the goats to the job site. Goats require a covered area (goats do not like to get wet), water, a mineral lick and other supplies while grazing. When the job was complete, these facilities would need to be removed and transported back to McCoy's farm. McCoy estimated these costs, which he called set-up costs, at approximately US$100. Fencing Goats tend to disperse when foraging, so it is difficult to keep them in one location. Enclosing the site served two purposes: it kept the goats within a confined area and provided some protection against predators, including bobcats, coyotes, bears and even domestic dogs. McCoy investigated various fences and discovered he could obtain vinyl fence for USS0.75 per linear foot, fully installed. The fence would be installed around the perimeter of the site, so fencing costs depended on site perimeter and fencing cost per linear foot. The vinyl fence was not reusable; McCoy would deliver it to a local recycle center when the job was complete. Shepherd and Dog A shepherd would transport the goats to and from the site. With the aid of a dog, the shepherd would also tend to the goats on site. McCoy determined 10 hours of compensation would cover the shepherd's time, including driving and tending to the goats. He found a local farmhand to take care of the goats on an as- needed basis. The farmhand was willing to accept US$190 per day to tend the goats. Shepherd and dog costs were determined by the number of calendar days and shepherd and dog rate per calendar day, fixed at USS190. Transportation McCoy already had a trailer that he could use for transporting goats, but using it more intensively would lead to increased maintenance on the trailer. Transporting the goats to the site and back would also require a truck with its own fuel and increased maintenance costs. McCoy believed USS0.63 per mile sufficient to cover the fuel cost and increased maintenance for both vehicles. McCoy would limit his transportation costs by making only one round trip each day with a fully loaded trailer of 25 goats. The proposed site was 40 miles from McCoy's farm in Soddy-Daisy, and would require two trips – one to the site and one return – each day. Overall, there were four aspects of transportation costs: rate per mile and miles to site, trips per day (limited to two) and number of calendar days. ANALYZING THE DECISION McCoy was reasonably certain if his goats performed satisfactorily on this project, the property owner would invite him to clear other portions of the property. Other property owners might learn of the success and invite McCoy to bid on clearing their properties as well. McCoy believed this could add significant value to his business, representing an important profit opportunity. McCoy did not want to limit his perspective to only this project. He decided to build a model to change any of the inputs, such as site dimensions, cost of fencing and miles to the site. The model could help him determine the profitability of each project based on the estimated total revenues, total variable costs and total fixed costs. With all of these thoughts, McCoy sat down at the table with paper, pencil and a computer with a blank spreadsheet open before him. He was ready to formulate the model to tell him whether he could make a profit on this project; one he could use to price future projects. McCoy needed to classify costs as either fixed or variable and incorporate these cost behaviors into his model. He realized a number of factors affected total costs, but he hoped the model could identify these factors. Exhibit 1 INCOME STATEMENT, 2010 per doe per herd of 100 does Revenues Milk sales 545.60 54,560.00 Other revenues 49.06 4.906.00 Total revenues 594.66 59,466.00 Variable costs Forage 99.00 9,900.00 Grain mixture 126.23 12,622.50 Milk for replacements 49.50 4,950.00 Supplies 13.20 1,320.00 Veterinary fees / medicine 24.20 2,420.00 Bedding 11.55 1,155.00 Fuel 5.48 547.80 Utilities 15.40 1,540.00 Repairs & other costs 11.00 1,100.00 Labor 148.50 14.850.00 Total direct costs 504.05 50,405.30 Contribution margin 90.61 9,060.70 Fixed costs Milking equipment depreciation 1,980.00 Housing barn depreciation 594.00 Machinery depreciation 357.50 Replacement livestock 2.838.00 5,769.50 Taxable income 3,291.20
Expert Answer:
Answer rating: 100% (QA)
Lets initial investment to start a ChimneyBricks manufacturing busin... View the full answer
Related Book For
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins
Posted Date:
Students also viewed these general management questions
-
6. Penury Company offers two products. At present, the following represents the usual results of a month's operations: Product K Product L Per Per Unit Unit Combined Sales revenue . $120,000 $1.20...
-
Using the contribution margin approach, find the breakeven point in units for Norcia Consumer Products if the selling price per unit is $11, the variable cost per unit is $6, and the fixed costs are...
-
Using the contribution margin approach, find the breakeven point in units for Staten Products if the selling price per unit is $11, the variable cost per unit is $4, and the fixed costs are $7,700.
-
A New York Times editorial argued that college students are taken advantage of by credit card companies: The credit card industry has made a profitable art of corralling consumers into ruinous...
-
Using the table of percentage points for the distributions, find (a) t.05 when d.f. = 7. (b) t.025 when d.f. = 11. (c) The lower .05 point when d.f. = 7. (d) The lower .05 point when d.f. = 11.
-
In the previous problem, suppose the firm was operating at only 80 percent capacity in 2008. What is EFN now? MOOSE TOURS, INC. 2008 Income Statement Sales Costs Other expenses Earnings before...
-
What is the purpose of financial statements? Would you want to produce them even if they were not required, say, for entity tax reporting?
-
Minelli Enterprises uses large amounts of copper in the manufacture of ceiling fans. The firm has been very concerned about the detrimental impact of rising copper prices on its earnings and has...
-
As of 1 Jan 2020, Alliance Bank has the following balance sheet and no off-balance sheet transactions or securitisation activities. Assets Liabilities and equity Cash $24 Deposits $1176 Australian...
-
Using the Internet, find two examples of advertisements for sports products that use indirect objectives and two examples of advertisements that use direct objectives.
-
Write a program to: 1) Build a matrix called R consists of multidimensional arrays. This matrix contains four layers; each layer is 35 sub-matrixes. First layer is sub-matrix with numbers from 2 to...
-
The seller has required the buyer to use their title insurance company. The seller has been told that if the buyer uses the title company, he will pay part of his real estate commissions, increasing...
-
Sideshow Bob's Circus is considering replacing its current Whack-A-Mole machines with a new and improved model. The old machines cost $600,000 7 years ago and is being depreciated to zero using...
-
How does the integration of emergent technologies such as AI, blockchain, and biotechnology redefine the landscape of innovation, and what are the implications for socio-economic structures?
-
What strategies can policymakers implement to cultivate a conducive environment for innovation, balancing regulatory frameworks with incentives to stimulate research and development?
-
Suppose you buy a $40,000 car and you 'put down' $5,000 and finance the rest for 72 months at 3.75% annual rate. Over the entire life of the loan, how much will you have paid in Interest on the loan?
-
A piping system has an assumed corrosion rate of 0.010 inch per year. An inspection shows an actual short term corrosion rate of 0.021 inch per year .The proper course of action would be to: A. Place...
-
Revol Industries manufactures plastic bottles for the food industry. On average, Revol pays $76 per ton for its plastics. Revol's waste-disposal company has increased its waste-disposal charge to $57...
-
Flextronchip, an OEM manufacturer, has a fifth-generation chip for cell phones, with chip specification of 0.2 0.0002 mm for the distance between two adjacent pins. The loss due to a defective chip...
-
Miami Valley Architects Inc. provides a wide range of engineering and architectural consulting services through its three branch offices in Columbus, Cincinnati, and Dayton, Ohio. The company...
-
What does the term cost management mean? Who in the typical firm or organization is responsible for cost management?
-
You have been asked to consult for an entrepreneur who is assembling investors for a new professional sport league. A critical decision for the league will be whether to organize under a...
-
Does a company share its risk by issuing equity or debt?
-
How are the features of a convertible bond similar to both debt and equity?
Study smarter with the SolutionInn App