De La Salle University

Ramon V. del Rosario College of Business

Management and Organization Department

Written Report Submitted

in Partial Fulfillment of the Requirements in
Management Accounting
(ACC535M)

Final Paper

Submitted to:
Prof. Jose Lauro Cruz

Submitted by:
Fernando M. Vergara II

Submitted on:
August 27, 2016

Company Background
Dorok Piggery is a livestock farm situated in Lipa, Batangas which focuses on the

selling of pigs. Currently the process begins by the farm buying small piglets from

other neighboring farms. Since the price of meat varies particularly depending on

the season, the price of piglets is directly correlated to them as well. Usually the

price of pork products rise as December closes in. This is because in the Philippines,

pork products such as Ham, are very popular as presents or dishes during Christmas

time. Currently, the price of piglets goes on a range from 1,500 to 3000 Pesos per

piglet. Once the piglets are bought, the farm goes on a cycle of fattening, where the

goal is to let the pigs get up to a certain weight (120kg). The cost of feeds per pig

typically ranges around 4000 to 5000 per month due to the fact that feeds are

also sensitive to price fluctuations in the market. The pigs are also given vitamin

supplements to help them achieve the target weight. Typically, the price for these

supplements cost around 666 per pig, per month.

There are also various overhead expenses that the farm typically incurs

during the fattening phase. Currently the farm employs only 2 full time workers

since handling pigs is not really a task that requires full time attention. Their tasks

usually comprise of feeding the pigs at specific intervals and also cleaning the pen.

Each employee is paid 3000 per month. Utilities also comprise of just water

expenses. Each month, the farm typically incurs only 500 for water expenses.

Currently the farm is considering expanding to cover for the breeding phase.

Breeding phase consists of having mother pigs give birth to piglets and nurturing

them up to an age where they are available for sale. As mentioned, currently Dorok

Piggery is sourcing its piglets from neighboring farms. Thus, in order to be cost

effective and be able to handle the volatile prices of pigs, the owners are exploring

the possibility of setting up their own.

 Since the farm currently still has excess space, this can be used to setup the

structures of the piglet breeding facility. Based on estimates, the pig pen will only

consist of 5000 to start the initial structure which can accommodate around 10

pigs at the moment. The extra production facility will need to entail an additional

person since breeding will entail more work (in terms of time) rather than the

fattening side of the operations, since the piglets and mother pigs need to be

constantly checked. This additional labor will cost around 6000 per month. The

company plans to start first by purchasing 3 sows (mother pigs) to start the process.

In order to maximize the space and cost, instead of trying purchase a specific male

pig to copulate with the sows, the company opts to have them artificially

inseminated. This process will cost around 600 per pig.

Feeding costs will also need to be taken into consideration. Feeds are not

standard in this industry. There are specialized mixes of feeds that are appropriate

for different ages/types of pigs. For a sow (mother pig), current computation for the

feeds would entail around 1500 per month, per sow. For the piglets, typically the

feeds cost around 26.00 per piglet, per day.

In terms of operations, a sow typically gives birth to around 18 piglets at the

start, and then goes down to as low as 11 piglets as time goes on. Sows also give

birth typically on a 3-month period. To help in decision making, estimates were

made based on the cost information given to come up with a profit scenario for a

whole year. The computations are as follows:

 Figure 1. Summary of Values

Estimated Income Statement at 3 Pigs and 11 Piglets each

1st 2nd 3rd 4th Cost per
quarter quarter quarter quarter Piglet
Cash 1,634.00
39,800. 11,000.0
Capital 00 9,366.00 0
1,500.0 1,500.0
Water (3 mos) 0 0 1,500.00 1,500.00 27.78
Feeds (Sow) (3 13,500. 13,500. 18,000.0 22,500.0
mos) 00 00 0 0
Feeds (Piglet) (1 25,740. 25,740. 34,320.0 42,900.0
mo) 00 00 0 0 780.00
5,994.0 5,994.0
Vitamins (3 mos) 0 0 7,992.00 9,990.00
18,000. 18,000. 18,000.0 18,000.0
Labor (3 mos) 00 00 0 0 333.33
Artificial 1,800.0 1,800.0
Insemination 0 0 2,400.00 3,000.00 1,141.11
Total No of Pigs 3 3 4 5

75,900. 75,900. 101,200. 126,500.

Sales 00 00 00 00
add: cash 1,634.00
66,534. 66,534. 82,212.0 97,890.0
less: expenses 00 00 0 0
39,800. 11,000.0
less: capital 00 9,366.00 0

-
Net Operating 30,434. 9,366.0 11,256.0 28,610.0
Income 00 0 0 0
 Figure 2. Estimated Costs per Quarter

Given the following information, it can be clearly shown that on the first quarter of

operations, the company will entail a net loss of 30,434.00. Sales were derived by

multiplying the selling price of 2300.00 with 33 piglets. This number of piglets is

already on the conservative estimate so that we better have a feel of the bad

market conditions. Remember that it was mentioned that sows typically give birth

to a low of 11 piglets and a high of 18. It is also important to note that there is a

high demand for piglets as local meat shops have orders for around a hundred

piglets per week. Thus it assumed that all piglets available for sale by the company

will be bought at the end of the period. However, even by using the low end of the

spectrum, the net loss is still significantly lower and can still be endured.

It is only upon the second quarter that the breeding operation will turn in a

profit. This is because there will no longer be a capital expense needed by this time.

All the deductions that will come for these period are due to product and period

expenses. Since the company incurred a net loss on the previous quarter, it can be

safe to assume that there will be no expansion to be undertaken on the 2 nd quarter.

Thus, the computations for sales and expenses are still estimated to be the same.

After accounting for the sales and expenses, it is expected that the company will

turn in its first profit, with an estimated total of 9,360.00

Since a profit was generated, the company will plan to reinvest this profit by

purchasing another sow for use in the breeding operation. This will entail an

additional infusion of 1634.00 in capital to be able to purchase another sow (based

on the estimate of 11,000 per sow). This purchase will have a direct impact on the

expenses as well since having more sows will entail having more feeds, vitamins,
water, artificial insemination expenses. However, there will also be an increased

number of piglets available for sale at the end of the quarter.

By the third quarter, the company would have to factor in the purchase of an

additional sow as capital expense. Thus, it would show up as an additional

9,366.00 in this account that will be deducted on the total sales. Aside from this

account, Feeds expense sows will also increase from 13,500.00 to 18,000 given

that it is estimated to cost 4,500 per month for each sow. Consequently, feeds

expense for the piglets will also increase substantially due to the fact that It is

expected that an additional 11 piglets will be born due to the additional sow

purchased. Thus, feeds expense for the piglets are expected to increase from

25,740.00 to 34,320.00. Labor will still be pegged at the same price since the

company does not feel that this increase will warrant a need to increase direct labor.

It is estimated that at the end of this quarter, the company will be able to generate

a much higher sales revenue (101,200.00) compared to last quarters sales

revenue (75,900.00). Adding the infused capital of 1634.00 by the owners and

then subtracting the total expenses for the quarter will yield the company a total

net operating income of 11,256.00 from the quarter.

Since the company has turned in a profit from last quarter, they can still

reinvest this in order to purchase another sow to increase income potential.

Purchasing an additional sow for 11,000.00 will add this same amount to the

capital expense account for this quarter. Water is expected to remain the same,

given that the pigs actually do not use that much water. However, feeds expense for

sows will increase yet again given the addition of a sow. This expense account will

increase from 18,000.00 to 22,500.00. Furthermore, the feeds expense for piglets

will also increase from 34,320.00 to 42,900.00 given that an estimated 11

additional piglets will be produced in this quarter. Vitamins expense will also

increase due to the purchase of an additional sow. Finally, expense account for

artificial insemination is also expected to increase by 600 due to the addition of a

new sow. By the end of the quarter, the company is expected to have a total sales

amounting to 126,500.00. However, total costs will increase proportionately to

108,890.00. Net income will double into 28,610.00. Keep in mind that this is a

conservative estimate since the company hasnt factored in the increase in price for

pork products during the last quarter due to Christmas festivities.

Since this scenario can be considered as an expand or retain decision point,

we can lay done the facts on a one year period to help the company make a sound

decision. First of all, we can factor out the sunk costs such as the rent for the area,

since this will still be incurred by the company even if they expand or not. The

things that need to be taken into consideration are the additional costs for buying

sows, increase utilities expense, increased direct labor costs, additional capital costs

(for building the pens). Aside from the costs, potential revenues should also be

considered to the decision making equation. Given that for the year, the operations

will generate a net income of 28,610.00 for the entire year, considering that the

alternative option is to just let the land be idle, this additional income is going to be

well received. Though the amount may be small, it should be taken into

consideration that as more sows are added to the mix, the marginal net income

increases substantially.

We can also use further analysis tools to be able to understand how much of

the sale amount is really going towards paying fixed costs and profit. This can be

done by calculating for the contribution margin ratio per unit.

 Variable costs are the feeds, vitamins, and artificial insemination of the sows.

Given that what we are selling are the piglets, we need to use this as the base unit

in calculating the contribution margin. Given the figures from the analysis of the

estimated costs for the breeding operations, we can come up with the following per

unit values to use in calculating the number of units that need to be sold in order to

obtain a target profit:

Figure 3. Per Unit Costs

By dividing the Contribution Margin per Unit with the Price per Unit, we can

derive the Contribution Ratio per unit of 14.32%. Roughly translated, it means that

for each piglet sold, 14.32% of the proceeds goes to paying the fixed costs and

profit.

Recommendation

There are a lot of opportunities for Dorok Piggery. Given that they are still not-fully

utilizing the land that they are renting as a whole, it doesnt make sense to just let it

dwell unused. Since the rent is already a sunk cost, the company must exhaust all
efforts in finding ways to be able to fully utilize the property. Naturally they can go

into other businesses that can still be considered as farming, such as poultry,

vegetables, fruits, and the like. However, piglet breeding is the most opportune

expansion option given that they already have a fattening operation in place. By

expanding into a business which can fit in seamlessly into their existing business,

this can help the company dictate costs and further streamline the business cycle of

their operations. Instead of purchasing piglets from other farms, which already have

placed a markup on the price, they can just technically buy their own piglets (by

using the costs as basis) and also sell the excess using a marked up price for

additional profit. This way, they can have a sustainable value chain, while further

increasing the utilization of their existing property and equipment.