Question

Percula Farms raises marine fish for sale in the aquarium trade. Each year, Percula obtains a batch of approximately one million eggs from a local supplier. Percula’s manager is trying to decide whether to use the farm’s facilities to raise Maroon Clownfish or Queen Angelfish. Clownfish eggs cost $5,500 per batch, while angelfish eggs cost $9,500 per batch. Due to differences in needs, only one species may be raised at a time and only one batch of fish can be raised in any 52-week period.

With current facilities, approximately 10 percent of clownfish eggs and 5 percent of angelfish eggs can be successfully raised to maturity. Clownfish take approximately 35 weeks to grow to a salable size, while angelfish take 50 weeks. Angelfish also require more care than clownfish. Each week, angelfish need two complete water changes and 20 feedings, while clownfish need only one water change and 15 feedings. Each feeding costs $150 and each water change costs $1,000. Heating and lighting costs equal $400 per week of rearing, regardless of which type of fish is being raised. Fixed overhead costs for the year amount to $80,000. Percula can sell clownfish for $4 each and angelfish for $10 each.

Required:

a-1. Calculate the operating income from raising clownfish and angelfish.

a-2. Which species should Percula raise to earn the highest operating income for the year?

c. & d. Percula’s manager is considering the following improvements, each of which will cost an additional $8,000 for the year. Due to resource limitations, only one can be implemented.

1. Purchasing a higher quality filter material that will significantly improve water conditions in the rearing tanks. The higher water quality will increase the survival rates to 12 percent for clownfish and 6 percent for angelfish. The need for water changes will also be reduced to one each week for angelfish. Due to the higher yields, feeding costs will increase to $160 each.

2. Installing newer, more efficient equipment that will reduce heating and lighting costs to $300 per week of rearing. The new equipment will promote more stable conditions, increasing the survival rates of clownfish to 10.5 percent and of angelfish to 5.5 percent. The slight change in survival rates is not expected to increase feeding costs.

i. Calculate the operating income from raising clownfish and angelfish with new filter material.

ii. Calculate the operating income from raising clownfish and angelfish with new heating and lighting.

iii. Which option do you think will be more beneficial and which fish species should be raised?

Answer 1

a.1 -Statement of Operating Income
						Amount in ($)
	Particulars		Clown Fish		Angel Fish	Details
	Sales	A	400,000			(1000,000Eggs*10% Production)*$4/per egg
				A	500,000	1000,000eggs*5% Production)*$10/per egg
Less:	Water Change Costs	B	35,000			35weeks*1time*$1000
				B	100,000	50weeks*2 times*$1000
Less:	Feeding Costs	C	78,750			35weeks*15feedings*$150
				C	150,000	50weeks*20feedings*$150
Less:	Heating & Lighting Costs	D	14,000			35weeks*$400/per week
				D	20,000	50weeks*400/per week
	Total Operating Expenses	E=(B+C+D)	127,750	E=(B+C+D)	270,000
	Opetaing Income	F=(A-E)	272,250	F=(A-E)	230,000
a-2:Advice:
In Normal Situation Operating Income (excluding Fixed Expenses) is $272,250 for Clown Fish , $230,000 for Angel Fish.
Hence raising Clown fish is more profitable than raising angel fish under this situation.
C-Purchasing Higher Quality Filter
	Pariculars		Clown Fish		Angel Fish	Details
	Sales	A	480,000			(1,000,000 Eggs*12% Production)*$4/per Egg
				A	600,000	(1,000,000 Eggs*6% Production)*$10/per Egg
Less:	Water Change Costs	B	35,000			35weeks*1time*$1000/per week
				B	50,000	50weeks*1times*$1000/per week
Less:	Feeding Costs	C	84,000			35weeks*15feedings*$160/per week
				C	160,000	50weeks*20feedings*$160/per week
Less:	Heating & Lighting Costs	D	14,000			35weeks*$400/per week
				D	20,000	50weeks*400/per week
	Total Operating Costs	E=(B+C+D)	133,000	E=(B+C+D)	230,000
	Operating Income	F=(A-E)	347,000	F=(A-E)	370,000
	AdditionalHifher Quality Filter Charges	G	8,000	G	8,000
	Net Operating Income	H= (F-G)	339,000	H= (F-G)	362,000
Advice:
Under this Situation Operating Income (excluding Fixed Expenses) is $339,000 for Clown Fish , $362,000 for Angel Fish.
Hence raising Angel fish is more profitable than raising Clown Fish under this situation.
D.Installing Newes More Efficient Equipment
	Pariculars		Clown Fish		Angel Fish	Details
	Sales	A	420,000			(1,000,000Eggs*10.5% Production)*$4/per Egg
				A	550,000	(1,000,000 Eggs*5.5% Production)*$10/per Egg
Less:	Water Change Costs	B	35,000			35weeks*1time*$1000/per week
				B	50,000	50weeks*1times*$1000/per week
Less:	Feeding Costs	C	84,000			35weeks*15feedings*$160/per week
				C	160,000	50weeks*20feedings*$160/per week
Less:	Heating & Lighting Costs	D	10,500			35weeks*$300/per week
				D	15,000	50weeks*$300/per week
	Total Operating Costs	E=(B+C+D)	129,500	E=(B+C+D)	225,000
	Operating Income	F=(A-E)	290,500	F=(A-E)	325,000
	Additional Equipment Charges	G	8,000	G	8,000
	Net Operating Income	H= (F-G)	282,500	H= (F-G)	317,000
Advice:
Under this Situation Operating Income (excluding Fixed Expenses) is $282,500 for Clown Fish , $317,000 for Angel Fish.
Hence raising Angel fish is more profitable than raising Clown Fish under this situation.