ownership vs custom hire: evaluating the decision dr. alex white virginia tech [email protected]
TRANSCRIPT
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
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”?
Custom Hire - Costs
Custom application rate $6-10/acre for spraying
Cost of chemicals Markup by applicator or purchase
yourself? Any labor costs? Other?
Ownership - Costs
Investment in machinery & facilities (fixed & variable costs)
Cost of chemicals Cleaning, storage, disposal, etc. Labor Liability insurance premiums Recordkeeping
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
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
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
Partial Budget Example
Current Situation
400 acres of cropland Custom spray rate = $7/acre Cost of chemicals = $60/acre
1-pass program
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
Assumptions
Chemical handling facilities already in place Storage, cleaning, rinsate disposal,
etc. Labor is available when needed No change in chemical costs
Reduced Expenses
Custom spray 400 A x $7/A $2,800
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
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)
Results
Under the assumptions
Net Change in Profit = ($1,990)/year
Reducing your profitability by $1,990/year by owning the spray equipment
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
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
Breakeven Custom Spray Rate
Fixed Costs / (Rate – VC) = Acreage
$2,154 / (Rate - $4.09) = 400 acres
Rate = $9.48/Acre
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?
Custom Hire - Advantages
No machinery investment (fixed costs)
No rinsate handling
“quick and easy”
Custom Hire - Disadvantages
Timing of application
Cost of chemicals
Dependability, availability
Ownership - Advantages
Better control of timing of application
Customized to your operation
Possibility of custom work
Ownership - Disadvantages
Cleaning, calibrating, repairing
Liability, liability, liability Insurance premiums
Recordkeeping Cost, time involved
Finding the time to spray
Other Factors to Consider?
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.