South Park Sally has a beef cattle ranch located near Fairplay, Colorado where she runs a herd of about 500 cows. Historically she has retained and developed heifers born to her own herd to serve as replacements for cows that are culled from the herd each year. She is now contemplating foregoing this process and, instead, simply purchasing pregnant heifers from a neighbor to replace her cull cows. These replacements would be of similar quality to the animals that she has been producing and bred to the same sire via artificial insemination (AI) by the neighbor. She would pay the neighbor $1,450 for each pregnant female when purchased around the first of November.

When Sally has developed her own replacement heifers, she has chosen 90 weaned heifers that would have otherwise been sold for $900 each in late October. She then feeds them through the winter at her ranch headquarters feeding them each $270 of hay, $25 of grain, and $32 of feed supplements. In the spring she breeds the heifers via AI and manages their veterinary needs. The breeding costs are $39 per animal and vet bill is $29 each. Then during the summer she rents grass for each of these heifers at a cost of $8,000. At the end of her summer/fall grazing, she ends up with 75 pregnant heifers that are introduced into the cow herd in early November. The 15 heifers that were not pregnant or were otherwise not suitable for being retained in the herd are sold at this time for an average of $1,375 each. In addition to the above costs, Sally hires extra labor to support this enterprise for $5,500 and incurs interest costs of $85 per animal held for development. She anticipates that the buildings and equipment on the ranch will depreciate by a total of $15,000 over the course of the year while these heifers are being developed.

Using a partial budget help Sally determine what she should do regarding her approach to obtaining replacement females for her operation. (In presenting your Partial Budget, be sure to explicitly identify the two scenarios implied by your budget (i.e. status quo or “base” and the alternative).

Now that you’ve constructed the partial budget, use it to determine the purchase price the neighbor would have to demand of Sally for the pregnant replacement heifers for her to be indifferent between purchasing them and developing replacements from her own herd.