Dorsal Ranch raises fish for sale in the restaurant industry. The company can obtain batches of 2 million eggs from its supplier. Management is trying to decide whether to raise cod or salmon.

Cod eggs cost $14,000 per batch, while salmon eggs cost $18,000 per batch. Due to differences in needs, only one species can be raised during a 52-week period.

With current facilities, approximately 15 percent of cod eggs and 10 percent of salmon eggs can be raised to maturity. Cod take approximately 40 weeks to grow to a marketable size, while salmon take 50 weeks. Salmon also require more care than cod. Each week, salmon require two water treatments and 35 feedings. Each feeding costs $400 and each water treatment costs $600. Cod require only 21 feedings and a single water treatment. Heat and light regulation costs average $300 per week for either species. The company can sell cod for $5 apiece and salmon for $9 apiece. Annual fixed costs, regardless of which species is raised, total $900,000. Instructions

a. Which species should Dorsal Ranch raise to earn the highest operating income for the year?

b. Other than fixed costs, which factors or categories of costs seem to have the greatest influence on operating income?

c. Management is considering one of the following improvements, each of which will cost an additional $20,000 for the year. Due to resource constraints, only one can be implemented.

1. Installing a new filtration system to improve water quality. This will increase the survival rates to 20 percent for cod and 14 percent for salmon. The need for water treatments will be reduced to one per week for salmon. Due to higher yields, feeding costs will increase by $80 weekly.

2. Installing an environment regulation system that will reduce heating and lighting costs to $250 per week. The equipment will increase the survival rate for cod to 16 percent and the survival rate for salmon to 11 percent. This slight change in survival rates is not expected to increase either water changing requirements or feeding costs.

Using your answers to part b above (with no calculations), which option do you think will be most beneficial?

d. Perform the necessary calculations to check if your answer to part c was correct. Should either of these investments be undertaken, and if so, which species should be raised?