Jaden McCoy operated a dairy goat farm in Soddy-Daisy,Tennessee.In January 2011,the owner of a

nearby resort approached McCoy about using goats to clear a section of his property.The property had

become overgrown with a variety of weeds,and was situated on a steep hillside that made it difficult for

the maintenance staff to reach with power machinery.This particular site was populated with nettles,

kudzu and poison ivy,all of which are safe for goats.There was no evidence of plants such as azalea or

oleander that are toxic for goats.

McCoy knew goats had become popular for property maintenance in situations where the terrain was rocky

or uneven.He had been approached by other property owners about renting out his herd,but had rejected

the offers because he was not able to determine the overall cost.To consider this offer,McCoy assembled

information to determine whether such an undertaking was profitable.The next step was to put this

information into a format that would help him decide whether he should accept the proposal.

MCCOY'S DAIRY GOAT BUSINESS

In the United States,the dairy goat business is fragmented and localized.According to the U.S.

Department of Agriculture's 2007 Census of Agriculture,there were 27,481 farms containing 334,754

goats,meaning each farm averaged 12 goats."Eighty per cent of the goat farms had fewer than 100 head.

There was not much demand for goat's milk from the general population,particularly when compared to

cow's milk Goat's milk was usually sold to local customers,frequently as feed for other animals due to its

high nutritional content.

McCoy's dairy goat farm was one of 50 within a radius of 100 miles,including eastem Tennessee,westemn

North Carolina,and northem Georgia.McCoy thought his farm of 100 does was the largest in the region

McCoy had many other business interests outside dairy goat farming,dairy goats represented a small part

of the total.They kept his 60 acres free of noxious weeds,did not require an inordinate amount of

attention and created a small profit.

McCoy acquired goats many years ago almost by accident.He attended the Hamilton County Livestock

Exposition with a girlfriend who thought the goats were"cute"when she saw them on exhibit.She

purchased four of them-a buck and three does-as a present.The present lasted longer than the

girlfriend did,and through the years the herd grew to its present size of 100 does and one buck The does

produced milk that McCoy sold to a local health food cooperative.

Multiple births are common for does.The period during which a doe lactates lasts up to 300 days.In the

latter part of the gestational period,the doe is dry and produces no milk.Some of McCoy's does were

unproductive because they did not become pregnant or produced little milk,so McCoy culled them from

the herd along with the excess kids to maintain a herd of 100.All the adult males except two were sold

because there was no reason to have males in a dairy herd,except to impregnate the females.

The primary source of revenue from the goats was milk sales,but other revenue was derived from the sale

of culled does and kids.The traditional method of allocating expenses in most animal-raising enterprises is

on a per-head basis,so costs in the dairy farm were allocated per doe.The primary cost was feed,including

forage,grain and minerals,but also milk for replacement livestock.Wages for day labourers were another

major expense.These employees helped McCoy tend the goats,milk them and deliver the milk to the

cooperative.

McCoy had to purchase replacement livestock each year to bring new blood lines into the herd,adding

vigor and improved milk production It also was necessary to replace livestock lost due to age,predation

and disease.This shrinkage could amount to as much as 25-30 per cent of the herd each year.A

replacement doe cost US$200-300,while a buck cost US$400-500.

Net revenue after variable costs-the contribution margin-had to cover the fixed costs of operating the

farm:depreciation of the milking equipment and other machinery,the bamn and purchasing replacement

livestock.The most recent income statement revealed the farm generated taxable income of US$3,291 in

2010(see Exhibit 1).This amount was added to other income McCoy eamned so he could calculate his tax

liability for the year.

THE PROPOSAL

The potential client was a resort of several hundred acres in the foothills of the Smoky Mountains between

Chattanooga and Knoxville,Tennessee.Due to the rocky terrain,the grounds keeping staff found it

difficult to maintain portions of the property.Workers frequently had to cut and trim by hand rather than

by machine,increasing the cost of property maintenance.Consequently,the maintenance supervisor called

Jaden McCoy one aftemoon to inquire about using goats in place of maintenance staff on the portions of

the property where machinery could not be used.The supervisor invited McCoy to suggest a price.McCoy

believed he was the only person bidding on the contract at this time.

REVENUES

Revenue from this project would come from renting the goats.McCoy did not have experience renting out

goats,but he believed he could eam a profit at a rental fee per day of US$15.Since he was the only bidder,

McCoy realized he could raise the fee if his calculations revealed that the project would be unprofitable.

McCoy had to determine how many goats were necessary and how long they would be on site.Since the

trailer held up to 25 goats,McCoy decided he would transport the maximum number of goats to the job,

pricing each job on the basis of 25 goats per day.The number of calendar days on a job would vary

according to the size of the site.

McCoy had to determine how much the goats would eat to adequately estimate the time for this project.

The amount of forage goats would eat actually depended on the density and type of vegetation A goat in a

pasture would eat about 250 square feet of forage daily,but McCoy had no idea how much they could eat

on a wild hillside.He decided to use 250 square feet as the numerical amount in his calculations,declaring

it the forage square feet per goat.In his formula,the site area,the number of goats and the forage square

feet per goat determined the number of calendar days the goats would spend on site.At 360 feet by 121

feet,the proposed property was an acre in size.

Once he determined the number of calendar days spent on site,McCoy could calculate revenue from the

proposed project as a function of the number of goats,the rental fee per day and the number of calendar

days.Due to difficulties loading and unloading the goats,McCoy decided to bill for a full day even when

the job required only a portion of a day.If a job took three and a half days to complete,the client would be

billed for four full days.

EXPENSES

McCoy identified four categories of expenses for the project:set-up costs,fencing costs,shepherd and dog

costs,and fransportation costs.

Set-up

McCoy realized he would incur some costs prior to transporting the goats to the job site.Goats require a

covered area(goats do not like to get wet),water,a mineral lick and other supplies while grazing.When

the job was complete,these facilities would need to be removed and transported back to McCoy's farm

McCoy estimated these costs,which he called set-up costs,at approximately US$100.

Fencing

Goats tend to disperse when foraging,so it is difficult to keep them in one location.Enclosing the site

served two purposes:it kept the goats within a confined area and provided some protection against

predators,including bobcats,coyotes,bears and even domestic dogs.

McCoy investigated various fences and discovered he could obtain vinyl fence for US$0.75 per linear foot,

fully installed.The fence would be installed around the perimeter of the site,so fencing costs depended on

site perimeter and fencing cost per linear foot.The vinyl fence was not reusable;McCoy would deliver it

to a local recycle center when the job was complete.

Shepherd and Dog

A shepherd would transport the goats to and from the site.With the aid of a dog,the shepherd would also

tend to the goats on site.McCoy determined 10 hours of compensation would cover the shepherd's time,

including driving and tending to the goats.He found a local farmhand to take care of the goats on an as-

needed basis.The farmhand was willing to accept US$190 per day to tend the goats.Shepherd and dog

costs were determined by the number of calendar days and shepherd and dog rate per calendar day,fixed

at US$190.

Transportation

McCoy already had a trailer that he could use for transporting goats,but using it more intensively would

lead to increased maintenance on the trailer.Transporting the goats to the site and back would also requre

a truck with its own fuel and increased maintenance costs.McCoy believed US$0.63 per mile sufficient to

cover the fuel cost and increased maintenance for both vehicles.McCoy would limit his transportation

costs by making only one round trip each day with a fully loaded trailer of 25 goats.

The proposed site was 40 miles from McCoy's farm in Soddy-Daisy,and would require two trips-one to

the site and one return-each day.Overall,there were four aspects of transportation costs:rate per mile

and miles to site,trips per day(limited to two)and number of calendar days.

ANALYZING THE DECISION

McCoy was reasonably certain if his goats performed satisfactorily on this project,the property owner

would invite him to clear other portions of the property.Other property owners might leam of the success

and invite McCoy to bid on clearing their properties as well.McCoy believed this could add significant

value to his business,representing an important profit opportunity.

McCoy did not want to limit his perspective to only this project.He decided to build a model to change any

of the inputs,such as site dimensions,cost of fencing and miles to the site.The model could help him

determine the profitability of each project based on the estimated total revenues,total variable costs and

total fixed costs.

With all of these thoughts,McCoy sat down at the table with paper,pencil and a computer with a blank

spreadsheet open before him He was ready to formulate the model to tell him whether he could make a

profit on this project;one he could use to price future projects.McCoy needed to classify costs as either

fixed or variable and incorporate these cost behaviors into his model.He realized a number of factors

affected total costs,but he hoped the model could identify these factors.

Exhibit 1

INCOME STATEMENT,2010

per herd of

per doe

100 does

Revenues

Milk sales

545.60

54,560.00

Other revenues

49.06

4,906.00

Total revenues

594.66

59,466.00

Variable costs

Forage

99.00

9,900.00

Grain mixture

126.23

12,622.50

Milk for replacements

49.50

4,950.00

Supplies

13.20

1,320.00

Veterinary fees/medicine

24.20

2,420.00

Bedding

11.55

1,155.00

Fuel

5.48

547.80

Utilities

15.40

1,540.00

Repairs& other costs

11.00

1,100.00

Labor

148.50

14,850.00

Total direct costs

504.05

50,405.30

Contribution margin

90.61

9,060.70

Fixed costs

Milking equipment depreciation

1,980.00

Housing barn depreciation

594.00

Machinery depreciation

357.50

Replacement livestock

2,838.00

5,769.50

Taxable income

3,291.20