Broiler Farm Facing Shutdown After a Feed Price Shock
A broiler farm near Bafoussam has a capacity of 10,000 birds per month. Its fixed costs are 3.6 million FCFA per month, covering loan repayment, depreciation and permanent staff. Variable costs are 15.6 million FCFA at 6,000 birds, 19.2 million at 8,000 birds and 24.5 million at 10,000 birds. The farm is a price taker in a competitive local market where the wholesale price is 2,700 FCFA per bird. It currently produces 6,000 birds and makes a loss. The owner is considering shutting down until prices recover. A feed supplier has announced a 20% increase in the price of feed, which accounts for 60% of variable cost at each output level. The bank has threatened to call in the loan if production stops.
1. Calculate average variable cost, total revenue and profit or loss at 6,000 and 8,000 birds. Should the farm shut down in the short run? Explain.
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At 6,000 birds: TVC = 15.6m, so AVC = 15.6m/6,000 = 2,600 FCFA. TR = 6,000 × 2,700 = 16.2m. Contribution = 16.2 − 15.6 = 0.6m. Loss = fixed costs − contribution = 3.6 − 0.6 = 3.0m. At 8,000 birds: AVC = 19.2m/8,000 = 2,400 FCFA. TR = 21.6m. Contribution = 21.6 − 19.2 = 2.4m. Loss = 3.6 − 2.4 = 1.2m. Since price 2,700 exceeds AVC at both outputs, the farm covers all variable costs and contributes to fixed costs. Shutting down would raise the loss to the full fixed cost of 3.6m, so it should keep producing in the short run. It should prefer 8,000 birds because the loss is smaller. At 10,000 birds AVC = 2,450; TR = 27m; contribution = 2.5m; loss = 1.1m, so 10,000 is even better if capacity and bird welfare allow.
2. After the 20% feed price rise, recalculate the average variable cost at 8,000 birds and determine whether the shutdown rule changes. Show your reasoning.
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Feed is 60% of variable cost. At 8,000 birds, TVC is 19.2m, of which feed = 0.6 × 19.2 = 11.52m and other variable cost = 7.68m. A 20% feed rise adds 2.304m, so new TVC = 21.504m and AVC = 21.504m/8,000 = 2,688 FCFA. Price is 2,700, so P > AVC by only 12 FCFA per bird. Contribution = 8,000 × 12 = 96,000 FCFA; loss = 3.6m − 0.096m = 3.504m. The farm should still operate at 8,000 in the short run, but it is close to the shutdown point. At 10,000 birds, feed = 14.7m, other variable = 9.8m, new TVC = 17.64 + 9.8 = 27.44m, AVC = 2,744 > 2,700, so 10,000 would be loss-making on variable cost and should not be produced. At 6,000, AVC rises to 2,912, also above price. The viable output shrinks to about 8,000 birds.
3. Explain why the farm might continue producing even when making a loss, and discuss whether the bank's threat is economically relevant in the long run.
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In the short run, fixed costs are sunk and the bank loan must be repaid whether or not the birds are produced. Continuing at 8,000 reduces the loss from 3.6m to 3.504m, so it is rational even though accounting profit is negative. The bank's threat is not a production cost, but it affects liquidity and the ability to survive; if the bank cuts credit, the farm may be forced to sell assets or close before prices recover. In the long run, the farm should exit unless price rises above average total cost. At 8,000, ATC = (3.6 + 21.504)/8 = 3,138 FCFA, above price 2,700. The owner should negotiate the loan, renegotiate feed contracts, improve feed conversion, or diversify into eggs and value-added products. The shutdown rule is not a licence to ignore long-run viability.