Grannell Farm

Case 5 – 2: Grennell Farm

Background of the Case: Ms. Denise Grey was notified by a lawyer early in 2010 that her deceased uncle, Jeremiah Grennell, had willed her the ownership of the 2000 – acre wheat farm in Iowa.
Problem Statement: Ms. Denise Grey wants to know if keeping the wheat farm would profit her instead of just selling it to someone else.
Action Plan:
Given the following data as certain balance sheet items, revenues and expenses for 2009: Units of Bushels
Accounts Receivable

Production Cost per bushel:
Cost
Beginning Inventory
0

Seed
0.053
Wheat production
210,000

Fertilizer and Chemicals
0.295
Shipping to grain elevators
180,000
20,000

Machinery cost, fuel, and repairs
0.107
Grain stored at farm at end of 2009
30,000

Part time labor and other cost
0.058

Total production cost per bushel
0.513
Price ($)

Price if shipped to the grain elevator
$ 2.90

Price at time of harvest
$ 2.80

Closing price per bushel on Dec 31,2009
$ 3.07

Average sales price of the 20,000 bushels
$ 2.98

Annual Expenses Not Related to Volume of Production
Salaries and Wages
$ 72,500
Insurance
$ 4,500
Taxes*
$ 32,500
Depreciation
$ 28,500
Other expenses
$ 45,000

Total cost:
$ 183,000

The income statements of Grennell Farm would look like the following given each method of recognizing revenue:
1.) Sales Method
Sales
(a) $522,000
Break down of CGS Beginning inventory
$0
Production cost
(b) $107,730 less: ending inventory
(c) $15,390
CGS
$92,340
Gross margin
$429,660
Other expenses
$183,000
Net Income
$246,660

2.) Collection Method
Sales
(d) $462,400
Break down of CGS Beginning inventory
$0
Production cost
(b) $107,730 less: ending inventory
(e) $25,650
CGS
$82,080
Gross margin
$380,020
Other expenses
$183,000
Net Income
$197,320

3.) Production Method (ending inventory is 0