Break Even

Table 10.2. Break-even use.

Acres

Total annual cost

10 50 100 200 500

$1040 1200 1400 1800 3000

TABLE 10.3. Cost per acre.

Acres TAC Cost per acre

50 1200 24.00

100 1400 14.00

200 1800 9.00

500 3000 6.00

rate of $21.00 per acre the cost for an annual use of about 60 acres per year it is more economical to hire work. At annual use of over 60 acres per year it is more economical to own the machine and do the work yourself.

This same method can be used to determine the beak-even point for costs with units different than dollars per acre. For the process to result in good information the custom rate and the total costs must be in the same units.

The BEU can be determined by the following equation:

where BEU = Break-even use (unit of use); AOC = Annual ownership costs ($/yr); CR = Custom rate ($/unit of use); OPC = Operating costs ($/unit of use).

Although this analysis indicates a hard-and-fast decision for a particular amount of use, the ownership—custom hiring decision should be tempered by other factors. Table 10.4 lists some advantages and disadvantages of custom hiring of farm equipment. It is most important to use consistent units with each of the terms. If

ra o

1

\

\

1

\

ost per ac ustom rate

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-C

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1

Brea

k Eve

n Poi

nt

0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500

Annual use (acres)

0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500

Annual use (acres)

FIGURE 10.2. Break-even analysis for $22.00 per acre custom rate.

Break-Even Use 149 Table 10.4. Advantages and disadvantages of custom hiring farm equipment.

Advantages

1. No ownership costs.

2. Cost of equipment can be invested in other enterprises.

3. Hired equipment usually supplies labor.

4. Less equipment is needed by owner, particularly specialized.

5. Owner can take advantage of newest machinery and techniques.

6. Producer with small jobs can gain benefits of large machines.

7. Custom operator is responsible for repairs, maintenance, and materials.

Disadvantages

1. May not be possible to schedule when needed.

2. Less control of quality of work.

3. Increased potential for losses because of delays.

4. Increased risk of spreading weed seeds and diseases.

5. Costs for large jobs may be higher than owning machines.

6. Small jobs have a greater chance of being postponed.

7. Producer may not be able to utilize own labor freed up by custom hiring.

the custom rate is in dollars per acre, the operating cost must be in dollars per acre. In this case the units of the answer will be in acres per year.

Problem: What is the BEU in acres for a $20,000 machine if the FC% is 22%, the operating costs are estimated to be $9.00 per hour, and the custom rate is $9.60 per acre?

Solution:

The calculation is not completed because the units are not correct. The custom rate and the operating costs must have the same units to be subtracted. When the desired break-even point is in acres, both the custom rate and the operating costs must have the units of dollars per acre. The dollars per hour units must be converted to dollars per acre.

Hours per acre is more commonly expressed as acres per hour, the capacity of a machine. Assume the effective capacity of the machine is 2.50 acres per hour.

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