VERSION 1 ACCTG 323 QUESTION 1 Continued: b) In her detailed analysis of the farms, she used operating expenses, number of cows, labour and land area as inputs with milksolids as the single output. The efficiency scores and target values for five farms are provided below (efficiency scores under constant returns to scale are provided in brackets). Explain the results for farm 2, commenting on its efficiency score and target values Calculate the scale efficiency for farms 1, 2 and 4 and explain why differences arise under CRS and VRS Compare farm 1 with farm 5 and explain the differences in targets. (6 marks) Input orientation, VRS Non- Farm Efficiency Category Original Target Radial radial 100% Operating Expenses 158350 147880 0 -10470 (CRS 72%) Cows Milked 135 128 -7 Ave. total labour units for year 0 Land area 87 43 -44 Total Milksolids 39943 45340 5397 2 70% Operating Expenses 210234 143068 62791 -4375 (CRS 70%) Cows Milked 245 172 -73 0 Ave. total labour units for year 2 -1 0 Land area 92 65 -27 0 Total Milksolids 68338 68338 0 3 85% Operating Expenses 166344 141026 25121 -196 (CRS 85%) Cows Milked 196 166 -30 0 Ave. total labour units for year 0 0 Land area 75 64 -11 Total Milksolids 67013 67013 0 4 93% Operating Expenses 169079 156426 -12653 (CRS 85%) Cows Milked 219 203 16 Ave. total labour units for year 2 Land area 110 79 -8 -22 Total Milksolids 77675 77675 5 100% Operating Expenses 111784 111784 (CRS 100%) Cows Milked 165 165 Ave. total labour units for year Land area 48 48 Total Milksolids 52964 52964 Page 3 of 11VERSION 1 ACCTG 323 SECTION A This section has THREE compulsory questions worth 47 marks in total. QUESTION 1 Dairy Farms Limited owns a large number of dairy farms and has recently engaged a consultant to produce an analysis of their farms' performance using Data Envelopment Analysis (DEA). The consultant has provided management with some preliminary results but unexpectedly has had to return to England to look after her parents. She has asked you to assist management with firstly explaining DEA generally and secondly explaining the results of her analysis. She provides you with the following simple graph to use in your general explanation of DEA to management: Two outputs normalised by input 12 10 10 . 12 Output 2/Input 6 A . 11 2 16 2 6 8 10 12 Output 1/Input a) Using the graph, explain how DEA works by identifying which Decision Making Units (DMUs) are on the frontier. Using DMU 9, roughly estimate its efficiency score visually and identify which DMUs will be its benchmarks. For the DMUs on the frontier, calculate their peer counts (i.e. the number of inefficient DMUs for which they are benchmarks) and explain what this information reveals. (5 marks) Page 2 of 11VERSION 1 ACCTG 323 QUESTION 1 Continued: c) The manager of Farm 2 is not happy with his results, claiming that there are many environmental factors that influence the costs of running his farm and the volume of milksolids produced. Specifically, he argues that the area where his farm is located has a very high rainfall leading to flooding and his farm area is very hilly in parts. The company gives you some information on annual rainfall and land contour for its 31 farms which you use in a regression with the DEA efficiency scores as the dependent variable and the rainfall and contour data as explanatory variables. Explain the results of the regression and whether the manager's argument is valid. (4 marks) Regression Statistics Multiple R 0.47673 R Square 0.227272 Adjusted R Square 0.172077 Standard Error 0.115035 Observations 31 ANOVA df SS MS F Significance F Regression 2 0.108977 0.054489 4.117625 0.02706292 Residual 28 0.370525 0.013233 Total 30 0.479502 CoefficientsStandard Error t Stat P-value Intercept 1.116389 0.109822 10.16539 6.69E-11 Annual Rain (m) -7.4E-05 3.03E-05 -2.4445 0.021058 Ave contour -0.13913 0.07126 -1.95246 0.060947 Note: Average contour 1=flat-rolling 2=easy hill 3=steeper Total for question: 15 marks