1 / 25

Ownership vs Custom Hire: Evaluating the Decision

Ownership vs Custom Hire: Evaluating the Decision. Dr. Alex White Virginia Tech axwhite@vt.edu. 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.

shaquana
Télécharger la présentation

Ownership vs Custom Hire: Evaluating the Decision

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Ownership vs Custom Hire:Evaluating the Decision Dr. Alex White Virginia Tech axwhite@vt.edu

  2. 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

  3. 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”?

  4. Custom Hire - Costs • Custom application rate • $6-10/acre for spraying • Cost of chemicals • Markup by applicator or purchase yourself? • Any labor costs? • Other?

  5. Ownership - Costs • Investment in machinery & facilities (fixed & variable costs) • Cost of chemicals • Cleaning, storage, disposal, etc. • Labor • Liability insurance premiums • Recordkeeping

  6. 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

  7. 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

  8. 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

  9. Partial Budget Example • Current Situation • 400 acres of cropland • Custom spray rate = $7/acre • Cost of chemicals = $60/acre • 1-pass program

  10. 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

  11. Assumptions • Chemical handling facilities already in place • Storage, cleaning, rinsate disposal, etc. • Labor is available when needed • No change in chemical costs

  12. Reduced Expenses • Custom spray • 400 A x $7/A $2,800

  13. 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

  14. Partial Budget Bad Side Reduced Rev $0 Added Exp $4,790 B. Total $4,790 Good Side Added Rev $0 Reduced Exp $2,800 A. Total $2,800 Net Change in Profit = ($1,990)/year (Line A – B)

  15. Results • Under the assumptions • Net Change in Profit = ($1,990)/year • Reducing your profitability by $1,990/year by owning the spray equipment

  16. 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

  17. Breakeven Chart

  18. Breakeven Custom Spray Rate • Fixed Costs / (Rate – VC) = Acreage • $2,154 / (Rate - $4.09) = 400 acres • Rate = $9.48/Acre

  19. 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?

  20. Custom Hire - Advantages • No machinery investment (fixed costs) • No rinsate handling • “quick and easy”

  21. Custom Hire - Disadvantages • Timing of application • Cost of chemicals • Dependability, availability

  22. Ownership - Advantages • Better control of timing of application • Customized to your operation • Possibility of custom work

  23. Ownership - Disadvantages • Cleaning, calibrating, repairing • Liability, liability, liability • Insurance premiums • Recordkeeping • Cost, time involved • Finding the time to spray

  24. Other Factors to Consider?

  25. 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.

More Related