IE 5304 Advanced Engineering Economy - Prof. Mohammad Jahanbakht - University of Texas at Arlington Introduction Michael Cox, a third-generation producer of eggs based in the small town of Summers, Arkansas, converted production in 2007 from conventional caged white eggs to specialty eggs. His company is called Arkansas Egg Company (AEC). The specialty eggs have three categories, and each have different cost structure, licenses, and operational facilities: Cage-Free, Free-Range, Pasture-Raised. Each could be organic depending on hens' feeding. It was early September of 2016 and the retail specialty egg market, which included cage-free, was weak, mostly due to an oversupply of conventional caged white eggs. Conventional caged eggs were a commodity and producer prices were sensitive to shifts in supply and demand. But specialty eggs were often grown under contracts that protected producers. This differential had gotten so large that consumers of specialty eggs were switching back to conventional eggs. Until now, his margins on production had been largely protected by a contract that guaranteed a fix price purchase but that contract would expire soon, and Cox would be competing in the open market for egg prices that were now a fraction of his production costs. Cox wondered how he could protect his investment and minimize his losses. Cost Structure at AEC In 2016, Cox managed to grow his business into three farms: Farm #1 in Missouri comprised 280,000 hens with a contract to produce free-range eggs. Farm #2 in kansas comprised 380,000 hens with a contract to produce pasture-raised eggs. Farm #3 in Kansas comprised 130,000 hens with a contract to produce organic cage.free eggs. AEC uses the Hyline Brown breed-commercial layers that will lay 26 to 28 dozen eggs in their lifetime. He gets them from the hatchery at $0.95 if purchased between 35 to 150 thousand, $0.9 if purchased between 150 to 250 thousand, and $0.85 if purchased 250 to 400 thousand chicks at a time. Assume each farm purchase separately from hatchery. By 24 weeks, when they really start laying, there is a pre- production cost. The investment is $6.35 for cage-free, $6.45 for free-range, and $10.23 for pasture- raised. Other costs are provided in the table below. The profit margins are estimated conditioning that AEC sells on this year's contract. Without the contract, Cox would have to sell eggs on the open market where brown eggs were trading at 50 cents per dozen. Approximate costs structure (if hens are spent on week 80) Acquisition from Hatchery Total pre-production cost weeks 1-23 Fixed overhead cost (facilities, debt service, etc.) Variable production costs (feed, transportation, labor, etc.) Optional: Organic Feed Depopulation Profit Margin Profit Margin of organic option $ / Per Bird $ / Per Bird Cage - Free Range - Free $0.85 - $1 $0.85-$1 $6.35 $6.45 $4.26 $4.26 $30.32 $4.3 $4.3 $0.15 $0.15 6.5% 7% 8.5% 9% $ / Per Bird Pasture - Raised $0.85 - $1 $10.23 $4.26 $30.32 $4.3 $0.20 8% 10% $30.32 1 Original problem was designed by David G. Hyatt in University of Arkansas Case No NA0511 Modified by Prof. Mohammad Jahanbakht for Advanced Engineering Economics course at UT Arlington Page 1 of 2 IE 5304 Advanced Engineering Economy - Prof. Mohammad Jahanbakht - University of Texas at Arlington On average, peak hen egg production occurred around week 35 and decreased thereafter. Hens "productive" for 55-57 weeks beginning with week 24 (table below), when the hens were "spent" i.e. not producing many eggs, but they were still consuming the same amount of food and thus it was no longer financially feasible to keep the hens alive. When the hens were spent the layer house was "depopulated," costing 15-20 cents per hen, and the house was readied for the next flock. Week 1-23 25 26-27 28-29 30-50 51-67 68-77 78 79 80 # of eggs per hen per week 0 0 3 3 4 4 5 5 6 7 6 5 4 3 2 Questions: 1. Assuming that market remains undisturbed, and price guarantees remain the same, use information in the case to calculate the fixed cost, variable cost, total cost, total revenue, and total profit of each of the three farms. 2. If AEC had had a choice to choose its contracts, what is the highest profit per hen that he can make? If Cox has $16 million in AEC's account, and he could choose his contracts, what would be his most profitable contract combinations for his three farms? 3. Use the provided information for this question only: Assume that in the contract, the price of cage- free eggs is $1.3 per dozen, range-free is $1.35 per dozen, and pasture raised is $1.7 per dozen. If additionally, the eggs are organic, $0.9 would be added to the contract price per dozen. Now assume that Cox want to determine (based on this information) when the hens at each farm are "spent" i.e. their marginal cost is more than their marginal revenue. (hint: only consider variable cost in calculating MC and explain the reason). 4. Now assume the market condition is getting significantly worse. If AEC wants to maintain its operations of the three farms and renew contracts for same specialty egg production, what is the breakeven price per dozen eggs for each farm? NOTE: In future assignments, I will ask you to conduct more sophisticated analysis on this same problem. Page 2 of 2 IE 5304 Advanced Engineering Economy - Prof. Mohammad Jahanbakht - University of Texas at Arlington Introduction Michael Cox, a third-generation producer of eggs based in the small town of Summers, Arkansas, converted production in 2007 from conventional caged white eggs to specialty eggs. His company is called Arkansas Egg Company (AEC). The specialty eggs have three categories, and each have different cost structure, licenses, and operational facilities: Cage-Free, Free-Range, Pasture-Raised. Each could be organic depending on hens' feeding. It was early September of 2016 and the retail specialty egg market, which included cage-free, was weak, mostly due to an oversupply of conventional caged white eggs. Conventional caged eggs were a commodity and producer prices were sensitive to shifts in supply and demand. But specialty eggs were often grown under contracts that protected producers. This differential had gotten so large that consumers of specialty eggs were switching back to conventional eggs. Until now, his margins on production had been largely protected by a contract that guaranteed a fix price purchase but that contract would expire soon, and Cox would be competing in the open market for egg prices that were now a fraction of his production costs. Cox wondered how he could protect his investment and minimize his losses. Cost Structure at AEC In 2016, Cox managed to grow his business into three farms: Farm #1 in Missouri comprised 280,000 hens with a contract to produce free-range eggs. Farm #2 in kansas comprised 380,000 hens with a contract to produce pasture-raised eggs. Farm #3 in Kansas comprised 130,000 hens with a contract to produce organic cage.free eggs. AEC uses the Hyline Brown breed-commercial layers that will lay 26 to 28 dozen eggs in their lifetime. He gets them from the hatchery at $0.95 if purchased between 35 to 150 thousand, $0.9 if purchased between 150 to 250 thousand, and $0.85 if purchased 250 to 400 thousand chicks at a time. Assume each farm purchase separately from hatchery. By 24 weeks, when they really start laying, there is a pre- production cost. The investment is $6.35 for cage-free, $6.45 for free-range, and $10.23 for pasture- raised. Other costs are provided in the table below. The profit margins are estimated conditioning that AEC sells on this year's contract. Without the contract, Cox would have to sell eggs on the open market where brown eggs were trading at 50 cents per dozen. Approximate costs structure (if hens are spent on week 80) Acquisition from Hatchery Total pre-production cost weeks 1-23 Fixed overhead cost (facilities, debt service, etc.) Variable production costs (feed, transportation, labor, etc.) Optional: Organic Feed Depopulation Profit Margin Profit Margin of organic option $ / Per Bird $ / Per Bird Cage - Free Range - Free $0.85 - $1 $0.85-$1 $6.35 $6.45 $4.26 $4.26 $30.32 $4.3 $4.3 $0.15 $0.15 6.5% 7% 8.5% 9% $ / Per Bird Pasture - Raised $0.85 - $1 $10.23 $4.26 $30.32 $4.3 $0.20 8% 10% $30.32 1 Original problem was designed by David G. Hyatt in University of Arkansas Case No NA0511 Modified by Prof. Mohammad Jahanbakht for Advanced Engineering Economics course at UT Arlington Page 1 of 2 IE 5304 Advanced Engineering Economy - Prof. Mohammad Jahanbakht - University of Texas at Arlington On average, peak hen egg production occurred around week 35 and decreased thereafter. Hens "productive" for 55-57 weeks beginning with week 24 (table below), when the hens were "spent" i.e. not producing many eggs, but they were still consuming the same amount of food and thus it was no longer financially feasible to keep the hens alive. When the hens were spent the layer house was "depopulated," costing 15-20 cents per hen, and the house was readied for the next flock. Week 1-23 25 26-27 28-29 30-50 51-67 68-77 78 79 80 # of eggs per hen per week 0 0 3 3 4 4 5 5 6 7 6 5 4 3 2 Questions: 1. Assuming that market remains undisturbed, and price guarantees remain the same, use information in the case to calculate the fixed cost, variable cost, total cost, total revenue, and total profit of each of the three farms. 2. If AEC had had a choice to choose its contracts, what is the highest profit per hen that he can make? If Cox has $16 million in AEC's account, and he could choose his contracts, what would be his most profitable contract combinations for his three farms? 3. Use the provided information for this question only: Assume that in the contract, the price of cage- free eggs is $1.3 per dozen, range-free is $1.35 per dozen, and pasture raised is $1.7 per dozen. If additionally, the eggs are organic, $0.9 would be added to the contract price per dozen. Now assume that Cox want to determine (based on this information) when the hens at each farm are "spent" i.e. their marginal cost is more than their marginal revenue. (hint: only consider variable cost in calculating MC and explain the reason). 4. Now assume the market condition is getting significantly worse. If AEC wants to maintain its operations of the three farms and renew contracts for same specialty egg production, what is the breakeven price per dozen eggs for each farm? NOTE: In future assignments, I will ask you to conduct more sophisticated analysis on this same problem. Page 2 of 2