PaRT 2: Combine Purchase versus Custom Hire (15 Points)

The purpose of this exercise is to learn how to calculate ownership costs and operating costs for a harvesting machine and compare them to the cost of custom hiring the same operation.

You can have your crops harvested by a custom operator or you can buy your own combine to harvest them yourself. To make this decision you must calculate the ownership and operating costs for the combine and then compare them to the cost of custom hiring. Assume the combine will be used on 500 corn acres and 500 soybean acres (1,000 acres total). Use the following information to evaluate this decision:

New list price of combine	$161,000
Purchase cost of combine (10% discount from list price)	$145,000
Salvage value (29% of list price after 8 years)	$46,690
Ownership life of combine in years	8
Interest rate	6.1%
Diesel fuel price per gallon	$ 3.20
Labor cost per hour	$20.00
Custom combining rate per acre	$30.00
Combine hours required per acre for harvesting, average of corn and soybeans	0.30 hours/acre

Ownership Costs (per year)

Estimate the average ownership costs associated with the combine over the 8 years you will own it. The costs of owning a combine include depreciation, interest, insurance and housing. Show your work. Round to the nearest dollar.

a. Depreciation, using the straight-line method and the purchase price $____________

1. Interest on average value of combine (first calculate the average of $____________

2. purchase cost and salvage value)

c. Insurance and housing (use 1% of average value of the combine) $_____________

d. Total ownership costs $_____________

e. Total ownership costs per acre on 1,000 acres $____________/acre

Operating costs (per acre). Round values to the near $0.01.

1. Repairs: (assume repair costs are 0.5% of the list price, for each 100 hours of use)

Average repair cost per acre =

0.005 list price (0.30 hours/acre / 100 hours) __________/acre

b. Fuel costs: Assume fuel requirements are 1.25 gallons/acre __________/acre

(average of corn and soybeans)

c. Lubrication costs: Lubrication costs are usually

calculated as 15% of the fuel costs per acre. __________/acre

4. Labor costs: Assume labor requirements for the size 1 combine, __________/acre

including travel, hauling and storing are 0.925 hours/acre

(average of corn and soybeans).

e. Total operating costs per acre $___________/acre

Total of ownership and operating costs per acre $___________/acre

Custom Hire Costs

Custom combining rate per acre $__________/acre

In addition, you have to provide 0.35 hours (average for corn and soybeans)

of labor per acre for hauling and storing, at $20 per hour. $__________/acre

Total cost of custom hiring, $ per acre $__________/acre

Which is cheaper, owning or custom hiring? ______________________________________

Calculate the breakeven number of crop acres you would need to justify owning a combine, that is, the number of acres for which costs of owning would be just equal to those for custom hire. Use acres (A) as your unknown value and solve for acres. Show your work.

Total ownership costs + (total operating costs per acre A) = (total cost of custom hiring per acre A)

Breakeven number of crop acres = ________________ + (___________ Acres) = (___________ Acres)

Breakeven number of crop acres = _________acres

If you have more acres than this, it is cheaper to own a combine or to custom hire? _____________________