Reference no: EM132288223
Assignment: Partial Budgets
Sam runs a 1,500 self-replacing Merino (SRM) ewe enterprise on the outskirts of Coonamble, NSW. He would like to diversify this production system and thinks it may be worth using a portion of his Merino ewes to produce first-cross lambs. Sam wants to understand how a change like this will affect his profit and he has hired you for this purpose.
Details of both systems are presented below. Assume an interest rate of 9.5%.
Current System
• Annual variable costs (husbandry, marketing and shearing) average:
? $38.50 per ewe
? $10.20 per Merino ram
? $11.60 per Merino lamb
• On average 1,200 Merino lambs are weaned each year (implying a survival rate of 80% from lambing to weaning).
• Each year 285 older ewes are cast-for-age (CFA) and 27 die on average.
• All wether lambs and ewe lambs that are not kept on farm as replacements and are sold.
• Rams are kept at a rate of 1:50 ewes. On average one old ram dies each year and four are CFA (at the end of their fifth breeding season). Replacement rams are purchased each year at $1,800 each.
• In the current market Merino lambs are averaging $79 each, CFA ewes $68 each and CFA rams $82 each.
• On average 72 bales of 18-micron wool are produced each year and sell for $2,200 each.
Proposed System
Adoption of the proposed system will require a portion of Merino ewes to be joined to a dual purpose sire. Sam has suggested joining 25% of his oldest Merino ewes to a Border Leicester (BL) ram. To keep annual labour requirements steady, he also suggested the management year for the first-cross activity start two months after the SRM activity. To comply with Sam's requirements you have come up with the following proposal and information:
• Merino ram numbers need to be reduced to 18 head. Excess Merino rams are expected to be sold at $950 each. (Note: these are different from the CFA animals sold each year).
• Seven BL rams will be purchased for the first-cross venture. These rams are expected to cost $1,450 each, and have annual variable costs of $13 each. One old BL ram should be CFA each year at $89 on average. This ram will need to be replaced.
Assume no BL ram deaths.
• First-cross lambs are expected to have an 88% survival rate (after accounting for lambing, marking and weaning). Annual variable costs for first-cross lambs are expected to average $14.30 each. All first-cross lambs will be sold into the prime lamb market at an average price of $176 each.
• To meet market weight requirements the first-cross lambs will be supplementary fed prior to sale. Annual feed costs are estimated to be $52 per lamb.
• BL rams and first-cross lambs will be shorn at the same time as the Merino flock. As a result of the enterprise change, four bales of 18-micron wool will be lost and two bales of 26-micron wool will be produced. The 26-micron wool bales are expected to sell for $1,120 per bale.
• Twenty hectares will be sown to Lucerne to support the lambing ewes and first-cross lambs. The establishment cost of the Lucerne is expected to be $72 per hectare and it will have a life span of six years.
• A new paddock and shed will be required to house the new rams. Combined, the new infrastructure will cost $18,400 and have a life span of 12 years.
• A small feed trailer will also need to be purchased to feed the first-cross lambs. This will cost $7,300 with a life span of 10 years and a salvage value of $1,000.
Note: livestock and wool bale prices are net of cartage, marketing and levies.
Tasks
1. Assess the profitability of the proposed project using a partial budget. Show your partial budget and discuss whether you think this change should be made (200 words).
2. Explain how non-monetary factors will influence the outcome of the partial budget (200 words).
3. Undertake a break-even budget for this change, using the price of first-cross lambs as the unknown variable. Discuss the results (200 words).
4. Undertake a parametric budget for the change to the new system; the price of first-cross lambs and the sale price of wool are the unknown variables. Discuss your results (200 words).
Presentation
Make sure your budget is contained on a single page. Budgets should be numbered consecutively in the text, and contain a concise but descriptive heading.
All illustrations (line drawings, graphs, maps or photographs) are classified as figures. Figures should be numbered in consecutive order in the text, and a concise but descriptive caption must appear below each figure. Figure legends must be included and understandable without reference to the text.
All numbers should be in whole dollars ($987) or in dollars and cents ($986.78). When you select a method use it consistently throughout your budgets. Do not report values beyond two decimal points ($987.7676) round these values down. All numbers should be aligned by the decimal points. Use bold numbers to highlight relevant numbers or values.
You must clearly reference the source of your information at the foot of the budget or in the required references section of the assignment. Be sure to check your style guide to reference your information sources correctly using the APA method.