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Jaden McCoy, owner of a goatherd, engaged in renting out a part of his herd to do clearing jobs. He is looking now into venturing into additional jobs of renting his dairy goats to clear the overgrown areas. He thinks that additional goats to the job site would result in additional revenue.
David Currie and Kyle S. Meyer
Harvard Business Review (W11569-PDF-ENG)
December 13, 2011
Case questions answered:
- Compute the number of calendar days needed to complete a one-acre job using the current truck/trailer combination and the larger truck combination. Use this to calculate the maximum number of jobs McCoy could accept per year using each truck/trailer combination.
- Using question 1 results & exhibit #1, compute the incremental annual revenues (cash inflows) and expenses (cash outflows) given a larger truck (i.e what is the difference in revenue and expenses between the old truck and the new truck).
- Using the results from # 2 prepare a model of the initial investment and incremental cash flows for the next 5 years. Utilize NPV, IRR & payback period.
- What would you recommend to McCoy regarding the goat rental operation?
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Case answers for Goats: The Green Alternative (B)
This case solution includes an Excel file with calculations.
Summary – Goats: The Green Alternative (B)
Jaden McCoy owns a herd of dairy goats, and he had successfully rented a portion of his herd to clear land at a nearby resort. The land clearing job resulted in a win-win scenario for both parties because it generated a small profit, and now McCoy is evaluating the possibility of bidding on similar land clearing projects in the area.
Similarly, this task benefited the resort owner because the project was completed within the budgeted costs. There were no additional charges and hard to reach areas were cleared. Also, this is an environmentally friendly way to remove Kudzu without spraying any chemicals that might cause pollution.
The owner believes that the financial gain for this line of business is constrained by the size of the truck and trailer used to transport the goats to the job site because he can only transport 25 goats per day. He thinks that a more massive truck and trailer would allow him to carry more goats-32 goats to the job site each day, generating incremental revenues, increasing the number of jobs, and reducing the number of days each goat must clear an acre of land.
However, he also realizes that a larger truck and trailer would result in increased operating costs. The owner, therefore, needs to determine the investment required to upgrade the old truck and trailer, which can only carry 25 goats.
Furthermore, McCoy must also determine if incremental revenues and costs associated with buying the more massive truck and trailer to accommodate 32 goats would justify the initial investment.
McCoy intention is to venture into additional jobs of renting his dairy goats to clear the overgrown areas. He thinks that additional goats to the job site would result in additional revenue.
The critical problem that McCoy faces in his decision is the extra operating expenses that may arise from this decision. These expenses include buying a new truck/trailer combination, which will cost him $24,475, the rate per mile for the larger truck will also increase from $0.63 to $1.25. Compared with the new truck/trailer combination, there are also the expenses of frequent repairs of old trucks/trailers.
McCoy must weigh between these expenses and the revenues associated with each option and decide if he wants to maintain the current operations of using old truck/trailer combination or buy larger truck/trailer. McCoy can employ capital budgeting decision techniques such as Net present value, payback period, and internal rate of return to determine if the investment he is about to undertake will be recovered.
The first part of the analysis is to calculate the number of days it will take 25 goats and 32-goats to complete one acre of land, the number of jobs to be accepted each year that will help in determining the total number of working days in a year. The total number of working days and the number of jobs will act as the activity cost drivers in calculating the incremental costs in both fixed and variable costs.
Using the old truck/trailer, it will take approximately seven days for 25 goats to finish one acre of land, which is equal to 43,560 square feet at a daily rate of 250 square feet per goat (6250).
When the larger truck/trailer is used, it will take approximately six days for 32 goats to complete one acre of the same land (43,560 square feet) at a daily rate of 250 square feet per goat (8000).
Based on the above results and comparison, it becomes clear that when the number of goats is increased from 25 goats by an additional seven goats to total to 32 goats, the number of days per acre is reduced by one day from 7 days to 6 days due to differences in the daily rates. This difference means that McCoy will work on more jobs.
The number of jobs to be accepted in a year if the old truck is maintained is 35 jobs given that the shepherd will work 50 weeks (per week= 5days), so in a year, he will work for 250 days. With this truck/trailer combination, it will take seven days to complete a job, and 250 days will result in 35 jobs. When the new truck is used, 41 jobs will be undertaken in a year with the shepherd number of working days being fixed. The variable activity is the number of days-6 days to accomplish a job. Hence, (250 days/6 days) will equate to 41 jobs.
From the above analysis, it can be noted that McCoy will have additional jobs from 35 jobs to 41 jobs if he uses the new truck to accommodate 32 goats instead of 25 goats. This additional jobs will result in additional revenue given that there will be five more jobs to be completed because of (41 jobs* 6 days) 246 total number of working days in a year compared with (35 jobs* 7 days) 245 working days in old truck/trailer combination.
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