The Cattle Company has gathered the following information about operations for the past three years. The owner has been expanding herd size and is frustrated that profits have not shown consistent growth.
Year 1 Year 2 Year 3
Cow herd size 120 140 180
Revenues from sale of calves $102,000 $119,000 $153,000
Feed 18,000 21,000 27,000
Labor (1 cowboy per 120 cows) 24,000 48,000 48,000
Cow depreciation 15,000 17,500 22,500
Bull depreciation (1 bull per 30 cows) 1,667 2,083 2,500
Medications/vaccinations 3,000 3,500 4,500
Land lease 10,000 10,000 10,000
Operating income 30,333 16,917 38,500
a) Determine which costs are variable, fixed, and "step" fixed. Complete the "per unit" cost table on the preprinted worksheet.
(b) How much is the per-cow contribution margin?
(c) How do the "step" costs explain the struggle to achieve consistent growth in profits? What strategy should Mathew undertake to maximize profit potential for his operation?
(d) Assuming Mathew's land will support a herd of 240 cows, project anticipated profits. Why is the profit more than twice as much as the amount that is earned on a herd size of 120 cows?