Download - Ownership vs Custom Hire: Evaluating the Decision Dr. Alex White Virginia Tech [email protected]
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Evaluating the Decision
Be objective Get rid of “Paint Fever”!
Understand your objectives Look at all associated costs Consider “non-financial” factors
Advantages Disadvantages Other
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Understand Your Objectives
Why do you want to own spray equipment? Improved quality Lowered expenses
What is your “profit center”? What is your “opportunity cost”?
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Custom Hire - Costs
Custom application rate $6-10/acre for spraying
Cost of chemicals Markup by applicator or purchase
yourself? Any labor costs? Other?
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Ownership - Costs
Investment in machinery & facilities (fixed & variable costs)
Cost of chemicals Cleaning, storage, disposal, etc. Labor Liability insurance premiums Recordkeeping
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Who Cares about Fixed Costs?
Fixed Costs Depreciation Interest Foregone Taxes & Insurance
Maintain constant productive value of assets
Estimate with 15-20% of purchase price
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Evaluating the Profitability
Partial Budgets Estimate the net change in profit due
to a change in the operation
Breakeven Analysis Estimate the minimum level of
performance needed to cover costs
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Partial Budgets
“Good Side” vs “Bad Side” Good = Added Revenues & Reduced
Exp. Bad = Reduced Revenues & Added Exp.
Look only at the factors that change!
Quick, simple, powerful
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Partial Budget Example
Current Situation
400 acres of cropland Custom spray rate = $7/acre Cost of chemicals = $60/acre
1-pass program
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Partial Budget Example
New System
400 acres of cropland 120 HP MFWD + 60’ boom sprayer Cost of chemicals = $60/acre Other costs of $1,000/year
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Assumptions
Chemical handling facilities already in place Storage, cleaning, rinsate disposal,
etc. Labor is available when needed No change in chemical costs
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Reduced Expenses
Custom spray 400 A x $7/A $2,800
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Added Expenses
Operating Costs: Tractor & Sprayer
$4.09/A x 400 A $1,636 Fixed Costs – total $2,154 Other Costs $1,000 Total Added Costs
$4,790
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Partial Budget
Good SideAdded Rev
$0
Reduced Exp $2,800
A. Total $2,800
Bad SideReduced Rev
$0
Added Exp $4,790
B. Total $4,790Net Change in Profit = ($1,990)/year(Line A – B)
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Results
Under the assumptions
Net Change in Profit = ($1,990)/year
Reducing your profitability by $1,990/year by owning the spray equipment
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Breakeven Acreage
FC of Equipment / (Margin/Acre) FC = Depreciation, Interest, Taxes,
Insurance Margin = Custom Rate/A – VC/A
$2,154 / ($7 - $4.09) = 740 Acres/Year
Becomes profitable over 740 acres/yr
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Breakeven Chart
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
Acres/Year
Cost of Owning
Custom Hire Cost
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Breakeven Custom Spray Rate
Fixed Costs / (Rate – VC) = Acreage
$2,154 / (Rate - $4.09) = 400 acres
Rate = $9.48/Acre
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Adding More Realism But I can buy the chemicals in bulk
Cheaper than what applicator charges Oh yeah, I need facilities
FC and VC Might need a nurse tank
FC and VC Impact on other enterprises
Increased or decreased production?
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Custom Hire - Advantages
No machinery investment (fixed costs)
No rinsate handling
“quick and easy”
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Custom Hire - Disadvantages
Timing of application
Cost of chemicals
Dependability, availability
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Ownership - Advantages
Better control of timing of application
Customized to your operation
Possibility of custom work
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Ownership - Disadvantages
Cleaning, calibrating, repairing
Liability, liability, liability Insurance premiums
Recordkeeping Cost, time involved
Finding the time to spray
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Other Factors to Consider?
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So What?
Think about your goals And your profit centers!
Evaluate the financial aspect Partial budget & breakeven analysis
Consider the “other factors” Choose the option that moves you
closest to your goals.