Farm C 

Farm C is the most profitable with operating income of $441,000 and EBT of $306,000 from its $900,000 of revenue. Cost of goods sold is on par with the benchmark of 24%. Direct operating expenses, at 23%, are better than the benchmark.

Farm C is generating $1.96 of revenue from each dollar of operating costs—an excellent result. Similarly, Farm C’s cost of capital and interest expense are lower than the benchmark, giving it EBT of 34%, or 7% above the benchmark. Its annual cost of capital is $99,000, generating $9.09 revenue per dollar of capital cost.

These are excellent results and imply the major management challenges are to maintain performance and decide whether to use profits to expand, invest in something else, or continue the status quo.

Farm B 

Farm B has $120,000 less operating income than Farm C and $170,000 less EBT. It’s seeing issues in operations, especially in cost of goods sold, which is 7% above the benchmark. This may be attributed to feed costs or a lack of productivity of the animals. Direct operating expenses are a little higher than the benchmark, and overheads are on par with the benchmark. Adding the three categories together, operating income is 9% lower than the benchmark, so Farm B has $120,000 less to contribute to capital, interest, and profits than Farm C. Farm B’s total operating costs are $576,000. Those costs are generating $1.56 in revenue compared to Farm C’s $1.96. Going deeper into Farm B’s records, one would likely find that its milk production per cow is low, and/or its feed costs are too high.

Overall, Farm B’s major strategic issue is controlling its operating costs and/or improving yields. Capital cost control will also improve profitability. At $135,000 and 15% of revenue, profitability is not bad, but compared to the benchmark, Farm B is leaving $108,000 on the table.

Farm A 

Farm A’s production performance is quite good with costs of goods sold being 2% above the benchmark and direct operating expense being 1% below. There appear to be some excess expenses in overheads that should be examined. Operating income, at 42%, is 3% lower than the benchmark.

Where performance is questionable is on capital and interest costs. The farm appears to be borrowing a lot of money for things that aren’t producing much value. Farm A’s annual cost of capital at 24% of revenue is $216,000; more than double Farm C’s. It is only producing $4.17 per dollar of capital.

Let’s examine the context for a deeper understanding. If Farm A has just made a major new investment, the impact of which has not yet shown up in revenue, then this result is understandable. However, if Farm A has machinery and equipment that looks nice but doesn’t work hard, then its 6% EBT on revenue is the result.