If profit is too low or negative, using costs per cwt allows you to compare your farm to other farms to determine your strengths and weaknesses. Comparing total income and total costs of different farms is not very useful because farms are different sizes and production levels. By using costs per cwt, you can compare farms of different sizes and types as well as dairy herds of different production levels. As you try to increase profits to reach your goals, it is useful to think about the profit formula.
Profit = (price/cwt milk + other income/cwt – cost/cwt milk) x volume milk sold
To illustrate this formula let’s suppose you have a goal of making $90,000 profit per year on three million pounds of milk sold (i.e. 30,000 cwt.) per year. Assume you cannot increase volume since you are using your facilities at capacity, and your cows are relatively productive. Because you have little ability to influence milk price per cwt, you only have significant control over the cost per cwt of milk. If the milk price is $19.00 per cwt with $2:00 per cwt in other farm income (culls, calves, crops, custom work, etc.) you can see from the formula below that you must reduce your costs to $18.00 per cwt to achieve the goal of $90,000 profit per year.
$90,000 = ($19.00/cwt milk price + $2.00 other income/cwt - $18 cost/cwt) x 30,000 cwt milk sold