Understanding the value-added areas of a business are key
to creating a competitive product or service. Accountants are often asked to
identify and quantify these parts of the business operation. In this assignment
you perform a value chain analysis.
Preparation
Review
Chapter 2 in your textbook for areas related to the value chain.
Study
the Fowler’s Farm Case Study (case study 2-47). Pay close attention
to aspects of its value chain.
Instructions
Perform a 3–4 page value chain analysis on Fowler’s Farm
using the information found in Case Study 2-47 of your textbook. Your
analysis should address the following:
Develop
a value chain that depicts six to nine activities that makes Fowler’s Farm
competitive.
Evaluate
the competitive advantage each activity confers upon the company.
Justify
which activity you believe is the most valuable for company growth.
Justify
your choice of the activity that you believe would benefit most from
optimization or alteration.
Recommend
a change that you would make to your selected activity to optimize it and
support your assertion quantitatively. Make sure to include any
assumptions or data values that need to be made to support your
recommendation.
Case Study:
2-47Strategic Positioning Fowler’s Farm is a 1,000-acre dairy and
tobacco farm located in southern Virginia. Jack Fowler, the owner, has been
farming since 1982. He initially purchased 235 acres and has made the following
purchases since then: 300 acres in 1985, 150 acres in 1988, dairy equipment and
buildings worth $350,000 in 1988, and 315 acres in 1998. The cost of farmland
has inflated over the years so that, although Jack has a total investment of
$1,850,000, the land’s current market value is $2,650,000. The current net book
value of his buildings and equipment is $300,000, with an estimated replacement
cost of $1,250,000. Current price pressures on farm commodities have affected
Fowler’s Farm as well as others across the country. Jack has watched as many of
his neighbors either have quit farming or have been consolidated into larger,
more profitable farms.
Fowler’s Farm consists of three different operating
segments: dairy farming, tobacco, and corn and other crops intended for
livestock feed. The dairy farm consists of 198 milk-producing cows that are
grazed on 250 acres of farmland. The crop farm consists of the remaining
acreage that covers several types of terrain and has several types of soil.
Some of the land is high and hilly, some of it is low and claylike, and the rest
is humus-rich soil. Jack determines the fertilizer mix for the type of soil and
type of crop to be planted by rules of thumb based on his experience.
The farm equipment used consists of automated milking
equipment, six tractors, two tandem-axle grain bed trucks, and numerous discs,
plows, wagons, and assorted tractor and hand tools. The farm has three
equipment storage barns, an equipment maintenance shed, and a 90,000-bushel
grain elevator/drier. The equipment and buildings have an estimated market value
of $1,500,000.
Jack employs five full-time farmhands, a mechanic, and a
bookkeeper and has contracted part-time accounting/tax assistance with a local
CPA. All employees are salaried; the farmhands and the bookkeeper make $25,000
a year, and the mechanic makes $32,000 annually. The CPA contract costs $15,000
a year.
In the most recent year, the farm produced 256,000
gallons of raw milk, 23,000 bushels of tobacco, and 75,300 bushels of corn.
Jack sells the tobacco by contract and auction at the end of the harvest. The
revenue this year was $1,345,000, providing Jack a net income after taxes of
$233,500.
Jack’s daughter Kelly has just returned from college. She
knows that the farm is a good business but believes that the use of proper
operating procedures and cost management systems could increase profitability
and improve efficiency, allowing her father to have more leisure time. She also
knows that her father has always run the farm from his experience and rules of
thumb and is wary of scientific concepts and management principles. For
example, he has little understanding of the accounting procedures of the farm,
has not participated in the process, and has adopted few, if any, methods to
maintain control over inventories and equipment. He has trusted his employees
to maintain the farm appropriately without using any accounting or operating
procedures over inventories or equipment, preventive maintenance schedules, or
scientific application of crop rotation or livestock management.