Case Analysis Black River Farms

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"Case Analysis: Black River Farms"

Parisa Poormohammadi 200411658 Prof. Robert Anderson

2019-10-14

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In recent years, the Black River Company has faced rising costs and declining price for its cows. Looking at the prices of cows, it can be seen that their price trend has been deteriorating since 2014. On the other hand, it has been believed over the years that the higher-weight cows produce larger calves, which can then make a good profit from their sale for the company. However, the analysis shows that the Black River Company has a negative profit margin. Therefore, one of the problems for the company is determining the right weight for cows and achieving a positive contribution margin. Since heavier cows have higher forage, supplements, and mineral costs, estimating the most profitable size of cows plays a vital role in bringing the company into better financial condition. Based on this analysis, they will be able to determine which weight category is the most appropriate and profitable, and accordingly they will be able to manage and control their costs.

In the remainder of this report, we first look at cost drivers of the company, then propose the best weight for cows to achieve a positive contribution margin, and finally calculate the company breakeven point.

One of the problems with accounting reports of Black River is that both fixed and variable costs are driven by the number of cows and do not take into account one of the important drivers of cost, which is the weight of cows. Therefore, given that the variable costs, especially supplements, minerals, and dry matters must be considered on the basis of their weight, the main cost driver in this report is the weight of the cows and for a more detailed analysis, the accountant should also consider this factor as a cost driver. Given that this report is based on CVP analysis, the rest of the costs are assumed to be fixed, although they appear to be mixed costs.

I have used two scenarios in my analysis. Thus, the contribution margin is calculated based on both the latest price ($148) (see table 1) and the average price ($184) (see table two). By comparing the cost of breeding per cow and the selling price of calves in each weight category, in both scenarios I have come to the conclusion that second weight category, which is 1100lbs, is the most profitable weight of cows for the herd. This is because contribution margin is the highest in this size and will decline in subsequent groups.

Table 1 Average cow weight (lbs) 1000 1100 1200 1300 1400 Table 2

Average calf weaning 585 611 617 622 630

Price of calf 865.8 904.28 913.16 920.56 932.4

Cost of dry matter& supplements & minerals 294.65 319.37 343.14 366.91 389.73

Contribution margin 571.15 584.91 570.02 553.65 542.67

Average cow weight (lbs) 1000 1100 1200

Average calf weaning 585 611 617

Price of calf 1076.4 1124.24 1135.28

Cost of dry matter& supplements & minerals 294.67 319.37 343.14

Contribution margin 781.73 804.87 792.14

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1300 1400 Table 3 Average cow weight (lbs) 1000 1100 1200 1300 1400

622 630

1144.48 1159.2

366.91 389.73

777.57 769.47

Selling price

Total costs

Total profit

865.8 904.28 913.16 920.56 932.4

893.35 918.07 941.84 965.61 988.43

-27.55 -13.79 -28.68 -45.05 -56.03

Therefore, these analyses show that by rearing heavier cows, the Greens just have to spend more money which in turn results in a negative contribution margin due to the fact that higher sales prices of these heavier cows cannot cover their costs.

Once the proper weight for cows' production has been identified, it is time to analyze the breakeven point in this category. As shown in Table 3, due to the fact that the company's fixed costs are high, selling price of $125 cannot cover all costs, which means that even by producing the correct weight for cows, the Black River Company is likely to see a loss in 2017. Hence, the breakeven point helps Black River managers find out what price is going to bring them to a positive profit margin. Given the total costs (fixed and variable) for the average cow weight of 1100lbs, the calculated price to reach the breakeven point would be $150.25. Figure 1 shows the breakeven point based on the number of units sold and the price mentioned earlier. As it is clear, the profit of the Black River will be zero in the price of $150.25. In addition, it is deduced if we assume that other factors are constant in the coming year, a sale above $150.25 will enable the company to cover total costs and thereby make a positive profit.

Cost-Volume-Profit Chart 1000

sales and costs

900

800

700

600

500 585

611

617

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622

Breakeven point

The thing worth mentioning here is that given the competition in the industry, raising prices above this level may not be possible. Therefore, it is suggested to the managers of the Black River Company to examine the market situation, the amount of supply and demand and the status of their competitors in the industry. If it is not possible to raise prices to cover costs, managers must make decisions to reduce their costs as much as possible. Furthermore, it may be possible to increase production capacity of the company. In the other hand, since future prices of cow products cannot be predictable and constant due to various factors, Donna and Jim should be able to increase their production capacity in the most appropriate cow size, which is indicated earlier. Both proposals will increase the company's profit margin.

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