Old Mule Farms Case Analysis

MANAGERIAL ECONOMICS

OLD MULE FARMS CASE ANALYSIS

EXECUTIVE SUMMARY

Donna and Jim Green are inherited the Old Mule Farms, a cow-calf operation, from their family. In addition to the major expense of this type of business which is the cost of feeding the cow with a variety of forage, nutritional supplements and minerals, other expenses are veterinary fees, labor wages, and expenses of owning and operating the farm. Due to the fall in the calf prices and the climb in the input cost, Old Mule Farms business made losses over the past years. Although some measures were implemented to increase the efficiency of the business, they were not sufficient enough to improve the situation.  After watching The Cattle Show, The Greens family started wondering what size of could generate the maximum the profit, and decided to use 2008 figures to analyze and determine.

To answer the above-mentioned problem, our team employed the Marginal Analysis method to determine the most appropriate cow size, which could generate the maximum profit (1100-lbs cow group).

1. What is the appropriate cow size for the herd?

The most appropriate cow size for the herd is the size that generates the maximum profit. In order to determine the maximum profit, we employed the Marginal Analysis method.

Step 1: Calculating Marginal Revenue

Based on Exhibit 3 and 4, we computed the Total revenue of each cow weight group by multiplying the price of calf in 2008 ($108/cwt) by the average calf weaning weight. After that, we calculated the Marginal Revenue (MR), following the formula below:

MR= [pic 1]

Step 2: Calculating Marginal Cost

According to the case, dry matter, annual supplements and minerals cost are variables cost, which depend on the cow size. We calculated the total variable cost based on Exhibit 5 and 6, then used the formula below to estimate the Marginal Cost (MC):

MC=[pic 2]

Step 3: Determining the maximum profit (Marginal Revenue = Marginal Cost)