INTRO TO AG ECON
INTRO TO AG ECON ARE 012
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This 8 page Class Notes was uploaded by Norbert Terry on Thursday October 15, 2015. The Class Notes belongs to ARE 012 at North Carolina State University taught by Staff in Fall. Since its upload, it has received 21 views. For similar materials see /class/223768/are-012-north-carolina-state-university in Agricultural & Resource Econ at North Carolina State University.
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Date Created: 10/15/15
OBJECTIVE EXAMPLE PRODUCTION COSTS THE PURCHASE OR LEASE DECISION To determine whether we should purchase a piece of machinery or equipment or whether we should rent or lease the services of such machinery or equipment We have a eld of corn to harvest soon and we are trying to gure out whether it is more economical to buy and use our own combine OR to use a custom combining service Cost of combine 60000 Expected useful life 12 years Salvage value 20000 Custom rate 5000 ac 1 ANNUAL OWNERSHIP COSTS a Depreciation cost salvage value 60000 20000 useful life 12 years 333333 year b Interest Cost salvage value X interest rate 2 160000 20000 X 08 320000 year 2 c Insurance Cost salvage value X insurance rate 2 160000 20000 X 008 32000 year 2 1 Property taxes Cost salvage value X local tax rate 2 160000 20000 X 00445 17800 2 Total annual ownership costs 703133 year e If I have 10 acres then 70313 will be ownership cost per acre 100 7031 1000 703 2 OPERATING COST Assume 850 per acre 3 Therefore if you have 1000 acres it will pay to buy a combine 1553 ac vs 5000 ac At what acreage would I quotBREAKEVENquot with respect to buying a combine versus using a custom combining service ANNUAL OPERATING COST TOTAL COST OF OWNERSHIP PER ACRE OWNING AND ACRES COST PER ACRE OPERATING PER ACRE 50 14063 850 14913 100 7031 850 7881 150 4688 850 5538 200 3516 850 4366 250 2813 850 3663 300 2344 850 3194 350 2009 850 2939 400 1758 850 2608 At what acreage is it economical to purchase a combine Note If 400 acres was all I could do with one combine in a season it would pay to purchase my own But if I owned 550 acres then it would pay to purchase one combine and have the remaining 150 acres custom combined If I had 700 acres it would pay to buy 2 combines Each time you exceed your limit of production with a machine you must reevaluate the remaining output level to see whether it pays to buy another machine or use custom service Using the previous example assume you only have 100 acres Cost of combining with own machine 7881 ac How many acres would I have to custom harvest to make my investment pro table 1 Total revenue from each acre harvested 5000 Operating cost for each acre 850 Total net operating revenue acre 4150 2 Total cost for own operation Ownership cost Operating expense Total cost Less the value of combining own land Balance to be covered by custom combine enterprise to breakeven 703133 year 85000 year 788133 year 500000 year 288133 year 3 Custom breakeven acreage 288133 year 4150 ac 6943 acres FORMULA FOR COMPUTING BREAKEVEN ACREAGE Total annual ownership cost custom rate ac operating cost ac An example 703133 year BOA 16943 acyr 50 ac 850 ac