The Old Mule Farms Case

To: Micheal Giberson, BECO 4310-014

From: Christopher Mboumba Mboumba

Date: January 11, 2016

Re: The Old Mule Farms

Donna and Jim Green should opt for a cow that weights 1200lbs as the appropriate size for their herd. But even with the implementation of this action regarding the appropriate size for their herd, Donna and Jim should highly think about “Farm diversification” in order to create more revenue which will ultimately allow them keep the farm for many more generation after them.

Why selecting a 1200lbs cow? The answer is clear and simple. Having a cow that weights in average 1200lbs allows Donna and Jim’s farm to generate at three different price levels a bigger selling price compared to the other sizes. The selling price being one of the key driver of the farm’s revenue, it is important for Donna and Jim to reach the highest selling price possible to stimulate a higher revenue level.  Table 1 below presents the different selling prices associated to each cow size. As we analyze the table, we can see that the highest selling price $617 is reached when the cow weight is 1200lbs.  A high selling price brings a high revenue to the firm. In fact as the table 2 shows it clearly, the revenue produces by selling a 612lbs calf ($33,318.00), which of course is the result of having a 1200lbs cow, is the highest amount all the other revenues. But it is not all about selling price and revenue. In fact, choosing to go with a 1200lbs cow also have an effect on direct cost. The Old Mule Farms case points out the mature weight of the cow as a key driver of direct costs. “The heavier the cow, the higher the forage, supplement and mineral costs she incurs” (Old mule farm case). Consequently by choosing a cow of 1200lbs, even though it is not the lightest weight, Donna and Jim permit themselves to reduce by a good margin their direct cost which with the increase of revenues can only be good for their farm.

Other than showing the different revenues related to the different cows’ sizes, the table 2 also provides us with the different contribution margins associated to those categories. Donna and Jim Green should look for the higher contribution margin amount all the options offered to them. Having a high contribution margin simply means that they have the ability to have a larger portion of their sale revenues not consumed by variable costs and so be able to contribute to the coverage of their fixed costs. The highest level of contribution margin ($8458.91) is reach with the option of having a 1200lbs cow that will then wean a calf of an average weight of 617lbs. Due to that, it would be wise for them to choose to go with cows that weight 1200lbs.

However, having a high selling price should not be the only concern of Donna and Jim because it will only get them out of the market and eventually lose their farm. In fact, the case states it clearly that: “high prices attract producers to raise more calves, but supply usually grows faster than demand does, leading to lower market prices and producers dropping out of the market”. It is that this point that the idea about “farm diversification” should be implanted. Donna and Jim should think about new money making activities for their farm such as growing foods, energy or tourism. By inserting those new activities, it will help them generate others funds which will keep the farm running for many more years.