METHODS FOR EVALUATING IMPORTANT FACTORS Q; AFFECTING SELECTION AND TOTAL OPERATINO' COSTS OF FARM MACHINERY ' Thai: for fin Dagm of Ph. D. 7 MICHIGAN STATE UNIVERSITY 7 George Herbert Larson 1955 /////////////” II/II/I/II/I/I/I This is to certify that the thesis entitled THODS FOR EVALUATING IMPORTANT FACTORS AFFECTING SELECTION AND TOTAL OPERATING COSTS OF FARM MACHINERY presented by George Herbert Larson has been accepted towards fulfillment of the requirements for Pb. DO ' OE. degree tn 24/77/4396; Major professorV Date August LI, 1955 0-169 METHODS FOR EVALUATING IMPORTANT FACTORS AFFECTING SELECTION AND TOTAL OPERATING COSTS OF FARM MACHINERY By George Herbert Larson AN ABSTRACT Submitted to the School for Advanced Graduate Studies of Michigan State university of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Engineering Year 1955 Approved by 75/7 275%? Mechanization of agriculture is requiring a relatively large capital investment in equipment. For 1953, records of 501 farms in the state of Michigan showed that the total capital investment per farm.not including house averaged $33,385, with the investment in machinery and equipment amounting to $7h61 per farm, or 22.h percent of the total farm.capital. Moreover, machinery investment has increased approthately 62 percent from.19h9 to l95u. With the rapid development of new farm machines the farm. manager is faced with the problem.of making adjustments which require cost prediction. One of the problems that needs fur- ther study is the development of some simple method for es- timating costs of Operating machinery that could be used by a person of non-technical background, say a farm.equipment dealer, farm operator, or perhaps extension workers. A set of alignment charts or nomographs has been developed for making machinery operating cost estimates; and tables have been prepared which are an aid to using the alignment charts. Another problem.which is in need of investigation is a method for determining when a machine is no longer economical to Operate and should be replaced by a new machine. One of the meortant factors affecting the point beyond which a machine is no longer economical to operate is cost of repairs. Re- view of literature indicated that there is a very limited George Herbert Larson 2 amount of data on how repair costs vary with use. This fac- tor alone limited the amount of work that could be done to develop a feasible method for determining when a machine is no longer economical to operate. The research work reported in the thesis was approached first by a review of existing literature and by obtaining published material in the form of bulletins, circulars, mime- ographed material and personal correspondence relative to farm.equipment costs. This information was needed as back- ground material for developing mathematical relationships and preparing alignment charts for estimating Operating costs of farm equipment. The above program was partially accomplished by writing to the heads of departments of agricultural engineering at colleges and universities in the United States and by con- sulting commercial agencies associated with farm.equipment. A survey in person was made of the cost records for trac- tors operated at Seabrook Farms, Bridgeton, New Jersey. Machinery cost records obtained from.J. I. Case Company and Green Giant Company were examined. Also cost records, re- ceived from Professor Bateman, agricultural engineering de- partment at the University of Illinois, were analyzed. The investigation confirms that one of the major factors affecting total operating cost of farm machinery is depre- ciation which is considered to be a fixed or Ownership cost. George Herbert Larson 3 It appears that the declining-balance method of depreciation as suggested by tax legislation for income tax purposes might also be used for estimating cost of depreciation for farm machinery when the exact amount is.not known since it tends to give a more realistic value than the straight-line method. Some of the simple nomographs or alignment charts con- structed.were tried out in a farm machinery class. The re- sults indicate that the charts will perhaps have some practical application by farm.equipment personnel, extension workers and farm.operators. Ehthusiasm.expressed by a representative of one of the major farm equipment companies indicates that the charts have some merit. ‘Results of a study of repair cost data on seven tractors for a period of ten years indicate annual repair costs increase at an increasing rate according to the relationship, Y . 0.3m1'61 ande is the year in question. This relationship is based on where Y is repair cost in percent of new cost an average annual use of 550 hours per year.. For the group of tractors analyzed it appears that they should be replaced at the ninth or tenth year based on the pro- posed method for determining when a tractor is no longer eco- nomical to operate. For the same group of tractors studied, it was Observed that a three year old tractor would provide the lowest average annual operating cost due to the high rate of depreciation during the first two years of use. gecrge Herbert Larson It is believed that more detailed information is needed on the relationship between repair cost and use to adequately evaluate the factors influencing operating costs of various farm machines. Past performance data of certain farm machines is probably the best source Of information for predicting be- havior of future machines. METHODS FOR EVALUATING IMPORTANT FACTORS AFFECTING SELECTION AND TOTAL OPERATDNG ‘ COSTS or FARM MACHINERY By George Herbert Larson A THESIS Submitted to the School for Advanced Graduate Studies of Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Engineering 1955 ~.. ‘03.. .-_aiai A 'jyaY/b‘? sz42~17 ACKNOWLEDGMENTS The author wishes to express his sincere thanks to Professor H. F. McGolly, Agricultural Engineering Department, who has skillfully and unselfishly supervised the investiga- tion upon which this thesis is based. He also wishes to express thanks to Dr. W. M. Carleton, Professor of Agricultural Engineering; Dr. G. L. Johnson, Professor of Agricultural Economics, and Dr. H. D. Eaten, Pro- fessor of Mathematics, for their suggestiOns and guidance during the investigation. The author is grateful to Dr. A. W. Farrall, Head of the Agricultural Engineering Department,for making this investigation possible. Special credit is due to Professor H. P. Bateman, Agri- cultural Engineering Department, University Of Illinois, for his assistance in supplying unpublished data relative to re- pair costs of tractors. Credit is also due to H. B. Pfost, Division Engineering Manager, Green Giant Company, LeSueur, Minnesota: to D. G. McAllister, Production Manager and L. A. Brandrup, Agricultural Engineer, Seabrook Fanms, Bridgeton, New Jersey; and to L. G. Samsel, Educational Division, J. I. Case Company, Racine, wis- consin, for their kind cooperation in providing cost record data. VITA George Herbert Larson candidate for the degree of Doctor of Philosophy Final Examination, July 28, 1955, 9:00 A.M., A. E. Room 120 Dissertation: Methods for Evaluating Important Factors Affecting Selection and Total Operating Costs of Farm Machinery Outline of Studies ‘ Major Subject: Agricultural Engineering Minor Subjects: Physics, Mathematics Biographical Items Born: January 28, 1915, Lindsborg, Kansas Undergraduate Studies: Bethany College, Lindsborg, Kansas, . . 1933 Kansas University, 1935-1938 Kansas State College, 1938-1939 Be Se 111 Ag. Eng” 1939 Graduate Studies: Kansas State College, l939-l9h0, M.S.A.E., 191,0 Michigan State University, 1953-1955 Experience: Graduate Research Assistant, Kansas State College, l939-l9h0 . Assistant Instructor, Agricultural Engineering Department, University of Wisconsin, l9hO-l9h2 Instructor, Panhandle Agricultural and Mechanical College, Goodwell, Oklahoma, Jan. 19h2-June l9h2 Junior Instructor, Navy Department, June, l9k2 to July, 1919 Naval Career: August, l9h3-January, l9h6. Commissioned with rank of Ensign. Received technical training in Aeronautical Engineering at Massachusetts Institute of Technology. Received instruction on aircraft mainten- ance at Vega Aircraft Corporation, Burbank, California and also instruction on aircraft engine overhaul at Naval Air Station, San Diego, California. Member of: Promoted to rank of Lieutenant (Junior Grade) on November 1, l9hh. Assistant Aeronautical Engineering Officer in the engineering division of the Assembly and Repair Department at N.A.S., Barber's POint' Oahu, Te He _AsSociate ProfOSsor, Agricultural Engineering Department, Kansas State College, l9h6-l950 Professor, Agricultural Engineering Department, Kansas State College, 1950- Honorggy Societies, Sigma Tau , Engineering Society Phi Kappa Phi y-Rational Scholastic Society Sigma Ii 9 Research Society Pi Mu Epsilon v Mathematics Society Sigma Pi Sigma - Physics Society Professional Societies American Society of Agricultural Engineers American Society of Engineering Education Kansas Engineering Society Miscellaneous Wfio's WHO in Engineering Who's Who in Midwest Licensed Professional Engineer in Kansas TABLE OF CONTENTS INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . OBJECTIVES . . . . . . . . . . . . . . . . . . . . . . METHOD_OP PROCEDURE . . . . . . . . . . . . . . . . . . RHVIEROFLITHRATURE.................. A. COst Functions . . . . . . . . . . . . . . . . B. Fixed or Ownership Costs . . . . . . . . . . . C. Operating or Variable Costs . . . . . . . . . . D. Determination of Break-even Point when to Hire . and When to Own the Equipment . . . . . . . . . INVESTIGATION O I O 0 O O O O O O I O O O O O O O O O 0 Part 1. Development of Alignment Charts for Estimating Duty Requirements of a Given Machine ..........y....... Part II. A Study of Depreciation Rates . . . . . . Part III.Use of Alignment Charts as a Method for Estimating Total Operating Costs of Farm Equipment . . . . . . . . . . . . . . . A. Simplified Method of Cost Prediction . Part IV. A Study Of Fuel and Oil Consumption Costs Part V. Investigation Of How Repair Costs vary Withuaeoeoeeeeeeeeeeeeee Part VI. DevelOpment of a Technique for Estimating When a Farm.Machine is no Longer Economical tOOPGrateeeeeeeeeeeeeeeee CONCIIUSIONS O O O O O O O O O O O O O O O O O O O O O 0 REFERENCES CITED . . . . . . . . . . . . . . . . . . . . OTIiER WRENCES . e e o O 0 O O O 0 0 e e e 0 e o e O O Page OJVOerp-I 15 21 26 26 36 he so 57 63 78 9O 92 9S TABLE I. II. III. IV. V. VII. VIII. 1. XI. XII. XIII. XIV. LIST OF TABLES PAGE Assessment schedule used by several states 12 Assessment schedule suggested by Michigan State Tax Commission 13 Average gallons per hour tractor fuel consumption 16 Annual use to Justify purchase of selected machines 25 Estimates of the number of work hours per day and the number of days suitable for field work 32 Available operating periods for several farm machines 33 Value at end of year based on $100 initial investment for the double-declining balance method of depreciation 38 Depreciation for current year based on $100 initial investment for the double-declining balance method of depreciation 39 ‘Depreciation for current year based on 3100 initial investment for combination double-declining balance method and straight-line method of depreciation ho Average annual depreciation to date based on $100 of initial investment Suggested values to use for total repair cost in percent of new cost for various farm machines 53 Suggested values to use in calculating annual repair costs for various farm.machines 5h Total charges in percent of initial cost for depreciation, interest, taxes, housing and repairs 55 Summary of data taken from.the 1952 tractor record book summaries of the J. I. Case Company 60 Summary of maintenance costs and use data from Green Giant Company 67 TABLE Page XVI. Summary of tractor maintenance costs and use l data from Seabrook Farms, Bridgeton, New Jersey 7h ! XVII. Relationship between average cost to date and margina1 cost based on average values for seven Farmall "M" tractors operated an average of 550 hours per year 8h FIGURE 1. Relationship Between Tractor Repair Costs and Use 2. Effective Capacity of Farm.Machines 3. Required Rate of Performance for Farm Machine h. Comparison of Depreciation Rates for Double Declining Balance Method and the Combination of Double- Declining Balance and Straight-Line Method of Depreciation 5. Relationship Between Value and Age of Farmall WM" Tractor With.Different Methods of Depreciation 6. Alignment Chart for Determining Depreciation Cost of Fanm Machinery 7. Alignment Chart for Determining Interest, Housing, Taxes and Insurance in Farm Machinery Costs 8. Alignment Chart for Determining Repair Cost of Farm Machinery Equipment 9. Alignment Chart for Estimating Tractor Fuel and Oil Consumption Costs 10. Alignment Chart for Estimating Total Farm Machinery Costs per Hour per $100 Initial Cost 11. Relationship BetweenTractor Repair Costs and Use For Group of Seven Tractors for the Period 1936-l9h6 (Rectangular Paper) 12. Relationship Between Tractor Repair Costs and Use for Group of Seven Tractors for the Period 1936 to 19116 (Logarithmic Paper) 13. Relationship Between Total Maintenance Costs and Use for Twenty-one Sweet Corn Harvesters at Plant H 1h. Relationship Between Maintenance Costs and Use for LIST OF FIGURES Twelve Sweet Corn Harvesters at Plant B PAGE 22 28 30 Ln he us ’49 51 52 56 FIGURE 15. 16. 17. 18. 19. 20. Relationship Between Maintenance Costs and Use for 33 Sweet Corn Harvesters at Green Giant Company, Le Sueur, Minnesota Relationship Between Average Maintenance Costs and Use for Four IHC Four-row Corn Planters Relationship Between Average Maintenance Costs and Use for Three Oliver "77” Diesel Tractors Relationship Between Average.Maintenance Costs and Use for Twelve Oliver ”88' Diesel Tractors Relationship Between Marginal Repair Cost and Average Repair Cost to Date for a Group of Seven Fanmall ”M” Tractors Relationship Between Average and Marginal Repair Costs for a Tractor Purchased New and Second-Hand PAGE 72 73 76 77 86 88 INTRODUCTION The factors which influence the operating costs of farm power and machinery, and which are closely related to the selection and management of power and machinery for the farm have been of great concern among agricultural economists and agricultural engineers for many years. It will continue to be so due to the continual development of modern machines for complete mechanization.of agriculture. Mechanization of agriculture is requiring an investment with a relatively large amount of capital in equipment. In 1953, records of 501 farms* in the state of Michigan showed an average capital investment per farm.to be $33,385 not in- cluding the house, while the investment in machinery and equipment amounted to $7h61 per farm, or 22.h percent of the farm.capital was invested in machinery and equipment. Also, it is to be noted that machinery investment has increased approximately 62 percent from.19h9 to 195”- The trend toward complete mechanization tends to require a much larger area of land on which to operate as well as to reduce the number of peeple engaged in farming. . Further, rapid developments of new sizes and types of farm.machines in recent years require adjustments in farm IDoneth, John C. (19Sh). Michigan Farm Business Report, Michigan Quarterly Bulletin, Vol. 37, no. 2, pp. 26h~272. operations and production methods. Advantageous adjustments, however, require cost prediction. The actual operating cost of farm.machinery is therefore one of the important factors that needs to be considered in keeping the total costs of production for a farming enterprise at a minimum. One of the problemm is the development of some simple method for estimating costs of Operating machinery that could be used by a person with non-technical background, by a famm equipment dealer, farm Operator, etc. The possibility of using alignment charts for cost es- timating purposes has been suggested and have been developed for this program. Another problem.which is in need of investigation is developing a method for determining when a machine is no longer economical to operate. A concept has been developed in this thesis which may have some merit in determining when a machine is no longer economical to operate. 1. 2. 3. u. OBJECTIVES To study the cost factors that are involved in estflmating operating costs of farm.equipment. To develop nomographs or alignment charts which farm.equipment personnel and farm operators can use to determine quickly from.equipment speci- fications, the cost of a certain operation or combination of operations. To determine the relationship between repair and maintenance costs and use for various farm.machines. To develop a method for estimating when a farm machine is no longer economical to operate. METHOD OF PROCEDURE The research work reported in this thesis was approached first by a review of existing literature and obtaining pub- lished material in the form of bulletins, circulars, mimeo- graphed material and personal correspondence relative to farm.equipment costs, needed in the way of background material for development of mathematical relationships and preparation of alignment charts for estimating operating costs of farm equipment. The above program was partially accomplished by writing to the heads of departments of agricultural engineering at colleges and universities in the United States and by con- sulting with commercial agencies working with farm equipment. A personal survey was made of the cost records for trac- tors Operated at the Seabrook Farms, Bridgeton, New Jersey. Cost records of tractors from various states as reported by the owner to the J.‘I. Case Company, which were obtained through correspondence with the company representative, were examined. Cost records of tractors, sweet corn harvesters and corn planters were obtained through correspondence with a representative of Green Giant Company. Cost records of seven tractors for a ten-year period obtained from.the Agricultural Engineering Department at the University of Illinois were analyzed. REVIEW OF LITERATURE Some of the factors which influence cost of production are as follows: 19 2. 3. h. 5. 6? 7. 8. 9. 10. Crops or products produced. Operations involved in their production. Season or period of time available for the various operations. Acreage to be covered for each crop. Capacity and performance of machine. Adaptability of machine to soil conditions. Power available. Whether or not custom work is to be done with a combination of machines and power. Relationship between labor and machinery costs. Actual cost of the operation. Davidson (1931) points out the fact that machinery cost is recognized as an important item in the total cost of agri- cultural production and that, therefore, in efficient and economical farm practice the investment in machinery should, be confined to an amount which will insure adequate returns. Bradford and Johnson (1953) state that when considering the quantity of equipment for the farm as a whole the capital available for desirable machinery purchases will be a limiting factor. For example, one short of capital may be forced to forego otherwise desirable machinery purchases since land improvements, production of livestock and soil improvement may also be needed. Thus, when considering the farm.as a whole, the problem is one of allocating capital so as to get equal marginal returns from.the last dollar spent on each part of the whole farming enterprise. A. Cost Functions I_There are several kinds of costs involved in most pro- duction processes. They are generally divided into two cate- gories, (a) fixed or ownership costs, and (b) variable costs. In the case of farm machinery the total cost is made up of the cost of the machinery, power and labor. The fixed or ownersh;p_cog§g generally include only those costs which do not depend on amount of use or output. They include such costs as depreciation, interest on investment, insurance, taxes and housing. The variable costs include those costs which are a function of the amount of use or output resulting in produc- tion process. Variable costs for farm equipment include such items as repairs, maintenance, lubrication, fuel and oil consumption of the auxiliary power unit, tractor or truck and labor. B. Fixed or Ownership Costs Depreciation is one of the most important fixed costs. According to Berger, Carleton, McKibben and Bainer (195h) depreciation refers to the loss in value and service capacity of the machine resulting from.natural wear, deterioration due to action of the elements such as rusting, corrosion and weathering, accidental damage, and obsolescence. It is obvious that a machine naturally wears out with use; however, the rate of wear depends upon such factors as skill of operator, lubrication, the conditions under which the machine cperates andthe design of the machine. Obsolescence is considered to be an important factor in depreciation and is a difficult one to evaluate because new machines superior to the old ones are continually becoming available. Some investigators have noted that some of the new tractor mounted implements are apt to have their obso- lescence determined by the life of the tractor upon which they are mounted. Depreciation is therefore caused by two factors, time and use. Time depreciation which is generally referred to as obsolescence takes place regardless of the amount of use. Use depreciation§ is related to number of days or hours machine is used per year. *Contradicts the definition of fixed or ownership costs; however the life expectancy of the machine is also dependent upon the care and maintenance it receives. 80 depreciation is not an operating cost and is included as a fixed cost. Review of literature indicates that depreciation is considered to be by far the largest cost of the fixed costs group. Hertel and Hilliamson (19u1) in a study at Cornell University show that depreciation represents in general about an percent of the total machinery costs; whereas re- pairs, interest and housing represent 22.19 and 13 percent of the total costs respectively. Penton and Fairbanks (1955) in a study at Kansas State College show that depreciation represents 60.1 percent of the ownership costs and 1h.8 percent of the total costs for the plowing Operation. It is quite evident that depreciation costs must be de- termined in calculating cost of using machinery. It is needed for such items as resale value, trade-in value, ap- praisal value, or for income tax purposes. The most common methods used for calculating deprecia- tion are (a) the straight-line method, and (b) the constant percentage method or reduced balance method. The straight- ‘ line method of depreciation reduces the value of a machine by an equal amount each year during its useful life. This , method has been most widely used for farm machinery since it is the simplest method for calculating depreciation. For the constant percentage method, a constant percen- tage is deducted each year from.the value remaining from the previous year. This method appears to be more realistic 10 since it permits higher rates of depreciation in the early years of use of the machine and a decreasing amount of de- preciation in its later life. This method has Often been used where value Of machine is desired for resale purposes or making appraisals. The straight-line method has been considered legitimate for estimating depreciation costs when the machine was not purchased for resale purposes but was purchased to perform service for its entire life. It should be noted according to the North Central Farm Management Extension Committee (1955) a new method for figuring depreciation has been brought on by the new tax legislation. The new method is known as the declining balance method and has been designed to permit a higher rate of depreciation for income tax purposes for farm.equipment and all farm buildings except the dwelling that is owned and occupied by the tax payer. This method has been studied for cost esti- :mating purposes and has been reported later in the thesis. Interest 93 inyggtment is considered to be one of the costs of ownership of a farm.machine since money used to buy a machine can not be used for other purposes such as purchase of land, livestock, and other productive enterprises. Inter- est is a return over and above the principal expected for its use and risks taken when money is lent or invested. In the case of farm equipment, the interest rate to use for cost estimating purposes will depend on local conditions and 11 3:» investment value of money; however, if the exact rate is not known a rate of S to 6 percent is generally used. The average annual amount to charge off during the life of the machine is generally based on one-half the initial cost plus estimated salvage value of the machine. This, of course, implies that the straight-line method of depreciation is used. Taxes for farm.machinery are based generally on the same rate as other farm equipment. The tax rate applied to the assessed valuation will vary widely in different counties and school districts. Fenton and Fairbanks (1955) report that tractors, combines, and trucks are usually evaluated for tax purposes as follows: ,,,70 percent of first cost for the first year, 55 percent for the second, as percent for the third, . 35 percent for the fourth, 25 percent for the fifth, 20 percent for the sixth, and 15 percent for the seventh. Other farm.machines are assessed on an estimated value. Over the full life of a machine the amount of the property taxes will be slightly less than 1.0 percent of the original cost of the machine per year. A person survey of several states indicated that the method used for determining the assessed valuation varied from.state to state. These results are shown in Table I. Table II shows the assessment schedule suggested by Michigan State Tax Commission. According to Fenton and.Fairbanks (1955) insurance of farm machinery for loss of fire, windstorm, etc. is not a universal practice; however, a charge for insurance is TABLE I ASSESSMENT SCHEDULE USED BY SEVERAL STATES Rate - Percent A —A ‘ I7F‘"“ifififir'_" Illinois Based on average finance value as .2.83 1953 reported in National Tractor and Farm.Implement Blue Book which is approximately 2/3 of average cash State Assessment Schedule A Taxrfiv-raso value e Kansas Based on FarmfiImplement Blue Book. 3.93 1952 Approximately 50% of'"as is“ ' 73111. e . Michigan Based on percentage or current 3.26 1951 or last published list price. See Tablell for rates suggested by Michigan State Tax Commission. Suggested rates used when not ‘ listed in tractor trade-in.manua1. Iowa Based on approximately 60% Of - - actual value of machine. Indiana Based on "average finance" value ‘ - - . as listed in National Tractor and Farm Implement Blue Book. If not listed in blue book, 30% deprecia- tion for first year, 10% additional for seeOnd and third year each, and 5% additional for each following year down to 30% of cost value A ' L __._¥ C .2:- TABLE II ASSESSMENT SCHEDULE SUGGESTED BY MICHIGAN STATE TAX COMMISSION ‘A v 13 h Method 1 Method 2 Methgd 3 Ag: % Good Age % Good Age % Good 1 75 1 75 1 7S 2 65 2 65 2 65 a 55 a 55 a 55 50 51 52 5 as 5 u? s 19 6 ho 6 hj 6 no 7 35 7 39 7 AB 8 3o 8 35 8 110 9 25 9 31 9 37 10 20 10 27 10 3h 11 23 11 31 12 19 12 28 13 15 1 25 if; 22 19 - 16 16 17 13 18 10 Method 1 ultivator - tractor Tractor Buck Rake Combine newer - tractor Pick-up Baler Corn picker Tractor Method 2 rac or Plow Potato Planter Forage Harvester Disc Plow Rotary Hoe Grain Binder Disc Harrow - Tractor Mower - Horse Thresher Endgate Seeder Side Delivery Rake Corn Binder Grain Drill Hay Loader Stationar Corn Planter Stationary Baler Silage utter Husker - Shredder Manure Spreader Method 3 ‘ walking Plow Springtooth Harrow Soil Pulverizer Riding Plow Spiketooth Harrow Riding Cultivator Disc Harrow - Horse Roller Hay Rack Dump Rake Wagon-Gear‘and Box TABLE II (Cont.) Instructions 1. Use depreciation tables only when the desired informa- tion is not listed in the tractor trade-in manual. 2. Base value for any equipment to be depreciated will be either the current or last published list price. 3. The depreciation tables are based upon the avera e life (Or hours to wear out) for any piece of equipment listed. The appraiser may vary from the schedule if any machinery has had maintenance which is better or worse than average. Source: Michigan State Tax Commission. 15 considered justifiable. If insurance is not considered, this means that the owner carries the risk himself. The rate to charge will vary with locality. However if the exact rate is not known, an average annual charge of 0.25 percent of the initial cost is suggested to cover farm.machinery insurance. Housigg is an expense and ought to be included as a charge when calculating costs of farm.equipment. There appears to be some doubt among investigators whether or not housing has any great influence on operating costs. Davidson and Henderson (19h2) have stated: It may be clear that housing has some beneficial influences in reducing the cost of repairs, but since the cost of repairs is affected so greatly by other causes, the influence of housing is more or less in- determinate. According to Barger, Carleton, McKibben and Bainer (l95h) a fair charge for housing is two percent of the initial in- vestment. Day (1951) reported a charge for housing based on the cost per square foot of storage space required for housing the machine. This method would probably be more exact from a housing cost standpoint but requires the cost of housing to be known or estimated. The most common practice seems to be to estimate housing costs based on some constant percentage of the initial.cost of the equipment. C. Operating or Variable Costs The Operating costs generally include such items as fuel, Oil, lubrication or daily service, repairs and labor of operation. 16' Fuel and oil consumption costs for tractors have been esti- mated in a number of ways when the exact amount is not known. Barger, Carleton, MoKibben and Bainer (l95h) suggest average values as shown in Table III for fuel consumption to use for different sizes of tractors and also suggests estimating oil consumption rate of 0.5 gallon per day when exact amount is not known. TABLE III AVERAGE GALLONS PER HOUR TRACTOR FUEL CONSUMPTION A Tractor Size Gallons per Hour Onegplow 1.00 Two-plow, light 1.50 Wo-plow, heavy 1.75 Threefplow 2.25 Four-plow 3.00 Another method for estimating fuel consumption that is sometimes used consists Of taking the fuel data for three- fourths load of the variable load tests as reported in the summary of results for the Nebraska tractor tests. The average Of all variable load tests is also considered satis- factory. The reason that the above method will give reason- able results is that it has been found that the average yearly load on a farm.tractor is about 75 percent of the rated load. 17 A survey carried on at South.Dakota State College re~ sulted in a method for estimating tractor fuel and Oil con- sumption costs when no accurate figures are known by means of the following formula: Fuel and Oil cost per day 8 Belt Horsepower x 0.8 x.Fuel Price per Gallon It is claimed that this formula makes enough allowance to include cost for grease. Kitchen and Larsen (1952) constructed an alignment chart with.which one can estimate what the fuel cost will be for different fuel burning tractors over a year's time. To use this chart one needs to know the rated drawbar horsepower, the fuel consumption in horsepower hours per gallon and the operating hours per year for the tractor being considered. The rated drawbar horsepower and fuel consumption are obtained from the Nebraska Tractor Test Summary Sheet. A chart Of the type just discussed is especially useful for comparing fuel consumption cost of different fuel burning tractors of comparable size. The question of how to estimate the fuel, oil and grease costs for power units on combines, balers, etc. is of interest. McKee (1953) reported using a constant percentage of retail price of machine for estimating the fuel, oil and grease costs. He reported these costs to be as follows: 18 Annual Charge Percent 9999;933' of Retail Price 6' motor mounted 1.7 7' motor mounted 1.7 8' self-propelled 2.h 10' " ” 2.h 12' " " Balers Meter mounted h.3 Repair costs are probably the most difficult to estimate since they are influenced by the amount of care, maintenance and use given the machine. Repair costs generally include material and labor costs. Although they are not generally the largest of the total operating costs they are an.impor- tant item.of expense to consider. Hertel and‘Nilliamson (l9hl) consider repairs as second in order of relative importance. .. Black, Clawson, Sayre and Wilcox (1951) suggest that the best method of handling these costs is to distribute the total cost of all renewals over the whole life Of the machine. This requires estimating the total renewals in ad- vance at the time the machine first goes into use. The same analysis applies to repairs, which are es- sentially no different from.renewals. At the present time the repair costs are based on some constant percentage of the original cost of the machine during its useful estimated life by many cost estimators. 19 There seem to be two schools of thought as to what per- centage to use for estimating repair costs. Many investiga- tors use an annual charge for repairs based on a constant percentage of original investment. For example, tractor re- pairs are often assumed to be approximately 3 to h percent of original investment. The other method seems to be to base the repair cost as a total percentage of new cost for an estimated number of hours of life for the machine in ques- tion. Richey (1950) reported total repair costs during life of machine in percent of new cost instead of an annual charge in percent of new cost. Thompson and Henhardt (1952) in their study of records suggest the following percentages to charge for repair costs where replacement cost is the price prevailing locally for a new and comparable machine. Tractor ---- ----- ------- 10,000 hours, 80 percent of present replacement cost. Tillage machinery ------- 3,000 hours, 100 percent of present replacement cost. Seeding machinery-~--~-- 2,000 hours, 150 percent of present replacement cost. Harvesting machinery---- 2,000 hours, 150 percent of present replacement cost. The above values include actual repair parts, time re- quired to obtain repair parts, shop equipment, and labor re-. quired for doing the actual repair work, and also lost time in the field while repairing machine. 20 worthington (1951) claims, since need for maintenance results largely from.natural wear, that maintenance costs for tractors are in the order of 3 percent of the delivered cost per 1000 hours of use. He stated that this figure is based on the experience of many farmers. In actual practice it is known that repair costs in- creasewith use, and therefore the assumption of charging off a constant percentage per year or hour during the life of the machine would be Justified only when the owner ex- pects to keep the machine for its entire service life and then only for limited use. If one does not expect to keep the machine its entire life then the question arises as to when the machine is no longer economical to operate. Two important factors that will have a great influence on the above question are the rate of depreciation and how repair costs vary with.use. Surprising as it may seem, little in- formation of this nature is available. Apparently this kind of information has been in the past of little concern to most investigators in the field of agriculture. In order to estimate maintenance costs for any particular year it is of primary importance that something is known about the behavior of repair costs during the serviceable life of the machine. There appears to be an extremely lim- ited amount of information of this kind available. Williams (1936) reported his experience concerning annual repairs and maintenance for two tractors on his farms for a 21 period Of 10 years. A plot of the data for one tractor is shown in Figure l. The results in Figure 1 indicate that the relationship between repair costs and use is linear for the first few years and levels Off for the rest of the period of . StUdYe D. Determination of Break-Even Point when to Hire and When to Own the Equipment The question Of when to hire and when to own the equip- ment is Of great concern to the operator who has a small acreage or few hours of annual use for the equipment in ques- tion. Some Of the factors that ought to be considered before one makes a decision are as follows: 1.. Is there enough annual use to justify ownership? 2. Is the service available at the time desired? 3. Will the delay of an Operation result in losses greater than the savings afforded by custom service? I h. Pride of ownership or personal desire. 5. Independence associated with owning the equipment. 6. Availability of capital required for owning the equi pment . Prick and Weeks (1951) state that, in general, a farmer can afford to hire when total cost of custom.work for a single piece of equipment is equal in value to the annual ownership, .3: one eumoo naeaom gouache neonaom adnoaoaaeaom .H..mam mhmew CH ow< N." CH m o N o \ \ \. XII popeswpmoa xx, x 3 \iv../ wlilf!!#lll¢\\ lo. .mam coma on: Hogans. oooaw pmoo HeavficH mpmoo nameomAHOpomae OH 0m 0: om 4903 men JO queoaeg u: are; mad satsdou 23 direct operating and labor costs for using equipment. Based on the above reasoning one can use the following for- mula as a means for determining the break-even point. Cost per hour custom work - Operating cost per hour- net cost per hour Fixed costs r ear et costs p0: hour 8 Break-even point, hours per year According to the above formula if one uses the machine fewer hours per year than the calculated value, then he would not be Justified in Owning the equipment from an economic point of view. If one needs to know how many acres per year the machine should cover, the following formula would be appropriate: Break-even point, hours per year ; Break-even point, erformance rate of machine, acres per year hours per acre Custom operation appears to be on the increase in some areas Of the United States since the small Operator is faced with the problem of getting enough use of his equipment to justify ownership. Large commercial farming operations generally own their equipment and in a few instances contract certain operations during peak periods. This scheme tends to reduce over- machining for the production process and keeps Operating costs at a minimum. It is of interest to note that one large vegetable ship- per in this country is operating 2500 acres without owning a single piece of agricultural equipment. All his work is con- tracted and he sticks to administration only since he believes this is the farmer manager's real function. Table IV indicates approximate annual use required to justify ownership of selected machines in Pennsylvania. 25 TABLE IV ANNUAL USE TO JUSTIFY PURCHASE OF SELECTED MACHINESl make“ smile; Combine, 6' power take-off $180‘ 50 acres Combine, 6' auxiliary engine 237 70 acres Combine, 12' self-propelled gas 180 acres Corn picker, 1 row, pull type 12h 36 acres Corn picker, 2 row, mounted 202 50 acres Forage harvester, power take-Off 185 50 acres Baler, twine tie, power take-off 193 8h tons Baler, twine tie, auxiliary engine 329 1&2 tons Diesel tractor --- 1500 hours *Includes depreciation, housing, taxes, insurance, and interest. t r 1 1Anonymous (1952). Pennsylvania Farm Economics, Penn- sylvania State College Agricultural Extension Service, Number [4.6. P. 3. 26 INVESTIGATION Part I Development of Alignment Charts for Estimating Duty Requirements Of a Given Machine The greatest single factor affecting the unit cost of Operation of a.machine is the amount of use. It is well known that any increase in annual use will tend to reduce the unit operating cost since the fixed costs remain essen- tially constant. As annual use increases, however, a point will eventually be reached beyond which untimeliness of the Operation will result. Any untimeliness of Operation will tend to induce losses which will more than Offset the apparent decrease in unit operating cost. Thus it is one of the imp portant factors to consider in selection and management of a power and machinery plant. The amount of annual use for a particular machine is in- fluenced by the following factors: 1. Crops or products produced. 2. Operations involved in their production. 3. Season or period of time available for the various Operations. h. Time actually available for field work in some localities may be only a small part of the total season due to inclement weather. 5. Size Of fields - acreage of each crop produced. 27 6. Whether or not custom work is to be done with a combination of power and machines. 7. Effective capacity Of machine. To estbmate the amount of annual use required of a machine for a given set Of conditions presents a problem. Therefore, a set of alignment charts has been prepared for this purpose. ,The use of alignment charts eliminates the need of making mathematical calculations. If the effective capacity of a machine is not known the first step is to use the alignment chart in Figure 2 which takes into account the variables (a) width Of machine in feet, (b) speed Of travel in miles per hour, and (c) lost time in performing the Operation, in percent. The percentage of time lost may be due to factors such as (a) lubrication, (b) adding fuel, (0) machine adjustment, (d) loading seed, fertilizer, etc., (e) unloading harvested pro- ducts, (f) idle travel such as traveling to field, turning at ends, etc., (g) clogging, and (h) breakdowns. The percentage Of time lost is difficult to evaluate. Results Of three seasons‘ records on a typical Illinois grain farm.reported by Bateman (19h3) indicate the following values to be reasonable for estimating purposes. Machine Percentage Of Lost Time'“ 2-bottom, 16-in. tractor plow 16-22 8' tandem.d1sk 9-23 18' spiketooth harrow 2h-30 “Does not include time for turning at ends. 28 .\ EFFECTIVE CAPACITY OF FARM 'mAcHINEs fl _ _ _._.m_.__._..__... __._—..__ . . Aw Lo m w m s r. s w. a.“ a We. 7.. 6. 5 4. 3 2 2 I l.. 0 0 0 «50: mud mmmo< Z. >._._u.._.owu..._w l4 —q-q—— —_~4fi—-1q— «— dq—q—u—q— q —q-«—_—__——q—fi—-_q W «2.. mm ale W98 7 6 5 4 3 2 1A! hum... 2. 1.3.3 mziosz (3 an . \\ \Om\\ a: ma 58 W = A «no: mun. mud: Z. owudmlm l 2 5 4 . 5 6 7 8 9 0 r. _____..____.__.b___..___...__ . _ _ _______L AV (E < y C > K SA hzwumun. 2.92.... Hmoulua 0 m , m. w m w P ll]! —Ia...__...__._.__._._..___._L____.._.b_._..~___.—__ Fig. 2 29 8' grain drill 22-30 A row corn planter (checkrowing) hl 2 row tractor cultivator 1st cultivation 20 2nd " 15 3rd " 12 7' tractor mower 31 12' combine 37-h} 2 row pull-type corn picker 35 If the amount Of lost time for any particular machine is not known a figure Of 17.5 percent is generally used. By knowing the percent lost time and width Of machine in feet line PU can be established as shown in the key of Figure 2. Then by knowing the approximate speed Of travel in miles per'hour the second line SA can be located by means of point On S escale and where line PW intersects the dummy or blank scale. The effective capacity of machine is then determined by the intersection Of the line with the A scale. Once the effective capacity of the machine has been deter- mined either by the alignment chart in Figure 2 or from actual experience,then Figure 3 can be used to determine the number Of acres to be covered per year. The number of acres a machine can cover in a year is a function of hours available per day for the Operation, the days available to perform the Operation per year and the effective capacity of the machine in acres per hour. 30 1 O. 4 REQUIRED RATE OF PERFORMANCE FOR FARM MACHINE Janfiqla T~_q_.|~a . 5. 3 lujmqu+__l_fi _ aha—A—uu «—O__(8!Q_em__q_n_u_:.fi _ —_mu_ 4 L d — — _ — _ — - _ 5 o. 3 no I I Q 2.0-+ ' 5 _ .4 O m. Gum—36mm mDOI mun. mwm0 mum zo_._.< m> mun. owmu>oo mwmu<|< 400- 500-— I (DO— _.+1*.1.«_q.4_fi_sd.fi _ «W 1 a J .— _44fi _ _ _ _ 3 4 5 7 8 9 W .I) CUL UJDIJ.(>< 0233: II F180 3 31 Very little data exists on how many hours per day are available for the various Operations of farm equipment. The number Of hours available per day tO perform a certain operation Obviously differs with geographical locations as well as with the time of year and perhaps type of Operation. For example, for harvesting wheat in Michiganfewer hours per day are available than for harvesting wheat in Kansas owing to the difference in atmospheric conditions. Table V shows estimates of the number of work hours per day and the number Of days suitable for field work for the state Of Georgia. Information Of this kind is needed for different geographical locations; however, this was the only published data discovered by the writer. The days available to perform the Operation per year are dependent upon the length of season for each Operation for the particular crOp in question and the actual days available for field work allowable by the weather. Some work was done on this phase to determine the approximate periods for common crops for the area around Lansing. Table VI shows the results Of this study. The data was Obtained by personal consultation with Layton Nelson of the Farm Crops Department and from information sheet prepared by Professor McColly of the Agricultural Engineering Department. This information does not consider the days that would not be available due to the weather. This kind of information is difficult to Obtain as conditions will change from season to season and from locality to locality. 32 TABLE v ESTIMATES OF THE NUMBER OF WORK HOURS PER DA! AND THE NUMBER OF DAXS SUITABLE FOR FIELD WORK STATE GEORGIA“ Bullock County Month Egggfiegogis ling: 8:132:23 f0; F;§l§:°;: f in Day of “Sith nofefiggth 1 January 8 7 7 February 9 7 7 March 10 8 9 April 11 9 9 May 12 9 9 June 12 i/2 9' 9 July 12 9 9 August 11 9 9 September 10 9 9 October . 9 1/2 9 9 November 8 1/2 9 8 December 8 8 8 *Hendrix, W. 11‘. and W. T. Fullilove (1942). Labor and Power Needs on Crops in Bullock County, Georgia. Georgia Experiment Station. Circular 139, 15 pp. 33 TABLE VI AVAILABLE OPERATING PERIODS FOR SEVERAL FARM MACHINES* Grain Crops in Michiggn Operation Corn Oats Barley Rye Hheat Flax Buck- ‘_ wheat Seedbed Ereparatien ** ** ** ** ’ Plew April 25 March Same Aug. k Disk _ te 25 te as te Harrew June 10 April]. Oats Sept.1S gfifigigg May 15 April}. " Aug. 25 Sigt. May 15 Up to -——3' to te te to to July June 15 May 1 Oct. 1 Oct. 15 June 1 10 Cultivating 3 weeks after planting 2 or 3 times Harvesting Oct. 10 Combine to July 15 Harvested Corn Nov. 10 to by July u Picker Aug. 7 " Cattle t9 Field Silage Ans. h Chopped Sept. 20 to Oct. 5 *Information sheet - Professor McCally, ll/lO/5u. GiFor Lansing area. Personal consultation with Layton Nelson, Farm Crops Department, Michigan State University.- 31+ TABLE VI (Cont.) Special Crops in Michigan Operation F1 1 S S _ e d ugar oy 5113113 Beans Beets Beans Potatoes Mint and Clova' Seedbed Preparation ** Plew Fall April 25 Disk plew te Harro June 10 Seeding June 1 April Little May 15 April 15 Seeding Time to 15 to later than to to in wheat June 15 May 15 corn, May Junsl May 1 Mar. 15 15 to to May 7 June 15 Harvesti‘ as Combine Sept 1 to Sept. 25 Sept. 30 to 0ct.25 Harvester Oct.25 Jflyl-lS Aug. 1 to to Nov. 15 Sept. 1%?) Sept. 30 HarvOSEing Mathzda- '31-)!- A. Wilted l. Mow Grass silage 2. ChOp and haul lst cutting 3. Blew into silo June 10-15 B. Direct Cut 1. ChOp and haul " 2. Blow into silo C. Lon Ha - Field Cured - Baled as 1.8Mowy lst and/er 2. Rake 2nd cutting 3. Load and haul Aug. 10- l+e StOI’O 25 D. Chepped Hay - Field Cured . M 2. Rz‘lze June 10-25 3 0 Chop 35 With the foregoing information, however, it is possible at least to approximate the days available to perform.the particular operation so that line HD as shown in the key of Figure 3 can be established. Then by knowing the performance rate of the machine in acres per hour, the acres to be covered per year can be determined by locating line AR as shown in the key. It should be pointed out that the alignment chart in Figure 3 can be used to determine the required rate of per- formance in acres per hour needed for a known number Of acres to be covered, days available to perform the operation per year, and hours available per day. Once the required rate of performance has been determined then.Figure 2 can be used to determine what size machine is needed to do the job in the time available. 36 Part II A Study of Depreciation Rates New tax legislation has instigated a new method for depreciating equipment at a higher rate. This method should be examined for possible use in estimating Operating costs Of farm.equipment. The new method, known as the declining balance method, uses a rate not to exceed twice the straight-line rate. It will permit depreciation of approximately two-thirds of the cost of the depreciable item.during the first half of its life. An explanation Of how the double-declining balance method works is in Order. If, for example, certain equip- ment has a 10-year life, 10 percent a year is taken on a straight-line basis. For the accelerated method the maxi- mum.depreciation allowed is 20 percent for the first year. In subsequent years, 20 percent depreciation is taken on the remaining unrecovered cost. The following equation was develOped for the purpose _Of calculating the value at the end of year in question for any desired estimated life and rate of depreciation: v=c(1 “Ex where C 8 initial investment estimated service life L X 8 year in question 37 R 8 rate of depreciation claimed V = value at end of year in question . According to the new tax legislation, R must not exceed two. When two is used this scheme is called the double- declining balance method. Tables have been prepared for several different years Of estimated service life and are based on $100 initial investment. The dollar value shown in the table might also be interpreted in percent Of ini- tial investment since it is based on 100 units. Table VII indicates the value remaining after depre- ciation at the end of year in question. Table VIII indi-. cates the amount of depreciation to be charged Off for year in question. Table IX.indicates the amount of depreciation to be charged Off for current year on the double-declining balance method up to the year when it is more advantageous to change over to the straight-line method on the remaining balance. Beyond the broken line, the table indicates the amount of depreciation to be charged Off for the current year on the straight-line method. ‘ The optional method is permitted in order that one can recover through depreciation allowance the full cost Of item when it is advantageous for income tax purposes. Figure u shows the comparison of depreciation rates for the double- declining balance method and the combination of double-declining _ balance and straight-line method. Figure 5 was prepared to show the relationship between value and age of a Farmall ”M” tractor with different methods sane .-.. sou. sea. 00!. lbs! eel- gene see; use: r a e 7 v . a a i I . u ~ ... atlas .«e ooee eu-u near a... son. on.» sea. ‘0‘. ease Dean case use: 6.5. Sens less so.» ce~s so.» even Ins: .J. ‘4 .o .e- Iv! ... .. .c .r. f... ,r. .a A.s '- a... no... .... c... ee-u ease r~-0 a...e euro .1.- ‘ :‘HL. ,fl a, , 747““... , V ( } J. .c C" 0 an 0 v. . at I . 1‘ _ . vu ' a! . .‘ " en. 9 It. ) .‘Ir . ..§ - C»: t I on: - ..§ ' II . ..r A .. . I ..1 ~ ..? . ..y - la, ' w on} ~ ..1 . 0“ ' H" « ”4 - I ..§ - l 0.1 " V i . a. . r x . . . I. V a l I 2 a o. .. .0 1. n L. we a o- te « n or e n: .a e .e u. e) *4 l a l :3 rc at .e I. .s .5 or e ihl .coaaiaoeaaon no venue: coda pnwdsaam one ooceadm wnaoaaoen NH cannon «o soaeosaosoo one one sense: 851m weasaaooo cannon hon noamm coaueaooaoon mo aooaaeosoo OH amow m 9.: OMHM -fl--- t0 W / soommpcmbom cons oompos ooflufimaoeom Hecoaoao mH SJCIIOC u: uotqetoaxdag T'“‘*‘“”y "’ “'fl{'"' * '”"' ’ ”1 100 T ‘”*” ‘ *"‘" * \l \ t ? 1 } I M! a E-“\\ \. i 1 § I i ”a; \ ‘ ' +' 1 8 ‘\ \\ i 1 ‘ 1 33° E 55 \L L \f L j L L L L } .L LL L L LLJ H 80 L L L LLL L LL :3, \\ ix & i i 'i :2 i { ‘ +3 S \. *4 “AS IS“ Value taken from National Tr ct ¢‘ L c: a or Z L\ % \\\Straight Line Mcthod 3 { P4 nd Farm Empllment $130 Book _; H 1 «a 5 $::\w\ \T\ l H \- i Q \ \fl : \ m g \ I \ \ R 1 \ ” 2 _fi _ _“flmfl_‘ W_»Www#7_ _#MHM‘A”_AR __ _flv‘__mwm_#‘ Law ~ x ‘ yo §\\ L '8' 1 i 7" ‘NN \ \"b\ \ Cf ; Double Declining 8 \4\ \ L 1 Balance yothod i . ’ 5 ‘ \\\;\\\u \x a) 20 :- L LL L L. L L i \ j o 20 L LLLLLLLLLLLLLL L LL L L .L LLLLLLLLLLLLL r3 g x a w\: > 2 I i p Lif. of 12 Years ‘\* 5 Life of 8 Years1 h 1 ‘ ‘v 1 1 0 L- L LLlLLLLLLLLLLLLL LL L L LLLLL 0 Lo L !L L. LLLLLL- L L L L L L L L L 2 u 6 8 10 2 4 6 8 10 12 Ag. in Years 100 w .L L A 100 “ fl "‘ ’“7 ’ C!) O O\ O 8 Life of 10 Your. Yalus 1n Dnllars For $100 Initial Cost 5 6 2 1+ Ago in 3’15. 5 Relationship Botwoon 80 60 "’ 20 LLLLLL.LLLLLL-___LL__L__L_L_LLLLL_LLLLLLLLL Value in Dollars For $100 Initial Cost Life of 1b Yoaru LLLALLLLLLJ O LLLLLL LLL—LL-.L__JLLL LL L]... L 6 8 10 o 2 a 6 8 Years Age in Years Yaluo and Ag. of rarmall "M" Tractor with Different Methods of Daprocintion For Straight Line Method. Aseumnd 10 Percent Salvage Yalus. 10 T'“‘*‘“”y "’ “'fl{'"' * '”"' ’ ”1 100 T ‘”*” ‘ *"‘" * \l \ t ? 1 } I M! a E-“\\ \. i 1 § I i ”a; \ ‘ ' +' 1 8 ‘\ \\ i 1 ‘ 1 33° E 55 \L L \f L j L L L L } .L LL L L LLJ H 80 L L L LLL L LL :3, \\ ix & i i 'i :2 i { ‘ +3 S \. *4 “AS IS“ Value taken from National Tr ct e‘ L c: a or Z L\ % \\\Straight Line Method 3 { P4 nd Farm Empllment ylne Book _; H 1 «a 5 $::\w\ \T\ l H \- i Q \ \fl : \ m g \ I \ \ R 1 \ ” 2 _fi _ _“flmfl_‘ W_»Www#7_ _#MHM‘A”_AR __ _flv‘__mwm_#‘ Law ~ x ‘ yo §\\ L '8' 1 i 7" ‘NN \ \"b\ \ Cf ; Double Declining 8 \4\ \ L 1 Balance yethod i . ’ 5 ‘ \\\;\\\u \x a) 20 :- L LL L L. L L i \ j o 20 L LLLLLLLLLLLLLL L LL L L .L LLLLLLLLLLLLL r3 g x a w\: > 2 I i > Life of 12 Years ‘\* 5 Life of 8 Years1 h 1 ‘ ‘v 1 1 0 L- L LLlLLLLLLLLLLLLL LL L L LLLLL 0 Lo L !L L. LLLLLL- L L L L L L L L L 2 u 6 8 10 2 4 6 8 10 12 Age in Years 100 w .L V A 100 “ fl "‘ ’“7 ’ C!) O O\ O 8 Life of 10 Year. Value in Dnllars For $100 Initial Cost 5 6 2 1+ Age in 3’15. 5 Relationship Between 80 60 "’ 20 LLLLLL.LLLLLL-___LL__L__L_L_LLLLL_LLLLLLLLL Value in Dollars For $100 Initial Cost Life of 1b Years LLLALLLLLLJ O LLLLLL LLL—LL-.L__JLLL LL L]... L 6 8 10 o 2 a 6 8 Years Age in Years Value and Age of rarmall "M" Tractor with Different Methods of Depreciation For Straight Line Method. Aseumnd 10 Percent Salvage Value. 10 1+3 of depreciation. The straight-line method, double-declining balance method and "as is” value are compared for estimated lives of 8, 10, 12 and 11+ years. For the straight-line method it was assumed that the tractor at the end of its life had a 10 percent salvage value. The ”as is" value is the appraised value given in the National Tractor and Farm Implement Blue Book published by National Market Reports, Inc. The ”as is" value is based on the premise that the tractor is in average "as is" condition. This value is used generally in arriving at a fair trade-in allowance valuation. Many ‘ dealers use it as their absolute maxim allowance figure. From Figure 5 and from the definition it is to be no ted that in all cases the straight-line method gives a higher value than the double-declining balance. Also, it may be noted that value at the end of the estimated life for declining balance method is within a few dollars of the 10 percent salvage value assumed for the straight-line method. It appears that the double-declining balance method will ap- proach the more realistic "as is" value for estimated lives of 12 and 11.]. years. It is believed that the double-declining balance method would have more merit than the straight-line method now being used by most cost estimators. This would be particularly true for one who does not intend to keep his tractor or machine its entire life. ‘ Since accelerated rate of depreciation in equivalent to a more rapid return of investment to the farmer he may make use of it sooner. Larger farm.operators who actually set aside reserves, based on depreciation write-offs, will be in a better position to buy replacements sooner. In cost estimating work it appears that one might be interested in knowing the average annual depreciation to date based on the double-declining balance method of depre- ciation. 'Uith this in mind, Table I was prepared to give the average annual depreciation to date for several estimated service-life years. hS 00.0 00.0 00.0 :0 05.0 05.0 00 00.0 00.0 00.0 00 :00 00.: N01: mm 00.: 00.: 00.: 00.: 00 00.: 00.: 0:9: 00.: 00 00.: 0:2: 00.: 05.: 00.:. 00 0:.: :0.: 05.: 00.: 00.0 50 00.: 05.: 009: 00.0 00.0 00.0 . 00 05.: 00.: 50.0 00.0 00.0 55.0 00 0 00 00.: 00.0 50.0 00.0 55.0 :0.0 00.0 00.0 :0 00.0 00.0 5:.0 :5.0 00.0 :0.0 0:.0 00.0 00 50.0 0:.0 00.0 00.0 00.0 00.0 :0.0 00.5 0:.5 00 0:.0 00.0 00.0 :0.0 00.0 00.5 00.5 0:.5 50.5 00.0 00.0 00.0 00.0 00.0 50.5 00.5 m0.5 00.0 00.0 00 .00.0 :0.0 0:.0 00.0 00.5 55.5 :0.0 0.0 00.0 0 .0 00.0 M0 00.0 50.0 50.0 00.5 00.5 00.0 00.0 mm.0 00.0 0 .00 00.00 00.00 00.0 00.0 00.0 0:.5 00.0 00.0 :0.0 .0 00.0. 00.00 00.00 00.00 00.00 m 00.0 05.0 50.5 00.5 0:.0 00.0 00.0 00.00 00.00 00.00 00.00 05.00 0:.:0 00.00 00.0 00.5 00.5 00.0 00.0 :5.0 00.00 05.00 50.00 0:.00 00.:0 00.00 .00 00.50 0:.00 m 00.5 00.5 00.5 00.0 0:H0 00H00 00n00 00.00 00.00 05.:0 00.00 00.50 :.00 00.00 05.00 : 00.5 00.5 00.0 00.0 00 0 00 00 00 00 00.00 00.:0 50.00 00.50 50.00 00.00 0:.00 00.00 0 00.5 00.5 00.0 00.0 00.00 05.00 m:.00 50.00 00.00 00.00 05.00 00.00 0:.:0 05.50 00.00 0 00.0 :0.0 00.0 00.00 00.00 00.00 0.00 00.:0 50.00 00.00 00.00 00.00 50.00 00.00 00.0: 0 00 .00 :0- Maw 00 0 0 5 0 0 [:1 230% .. 0.00.0 30>;me oopglfluam 1 0.00.0 ll H 0002000520 0400020 00 0000100 00000 0000 00 20HB4HoMmmHG A4055 @054 «ECHsdHommmmn .000 Dogma.“ Mo; .OZHZHQQHQ @509 H ”549. hl .00000008000 .00 02000: 0:00 3000.50 05 85000 0000:0030 OHDSOQ ho Gadudcdnaoo on» and 60:90: ooze 009509 000 nouem :00000000003 no confine NH OH 0000 Hem mc0c0aoen @300 .: .000 'l“" -m--- "r“*~w-w~w~uo / U) 800005.000 5:3 08,0000 800-000.0200 00000000 r m NH 0H Om SJCIIOC u: uotqctoexdag T'“‘*‘“”y "’ “'v['"' * '”"' ’ ”1 100 T ‘”*” ‘ v"‘" v \I \ t ? 1 } I M! 0 E-“\\ \. i 1 § I i ”a; \ ‘ ' +' 1 8 ‘\ \\ i 1 ‘ 1 33° E 55 ,\\l,,,, , \f A ,j, ,, , , , } ., ,, l , ,,,J H 80 4 L _ A-” _ _, :3, \\ ix & i i 'i :2 i i ‘ +3 S \. 04 “AS IS“ Value taken from National Tr ct a. , c: a or Z .\ % \\\Straight Line Method 3 § 0. nd Farm Emplement blue Book _, H 1 ea 5 $::\0\ \T\ l 0 \- i Q \ \fl : \ m g . I \ \ R 1 \ ” 2 _fi _ _“flmfl_‘ 0.»,nw0,_ _#MHM‘A”_AR __ _l_-__me_w‘ 2w ~ x , yo {<\\ , '8' 1 i 7" ‘NN \ \"b\ \ Cf ; Double Declining 8 \4\ \ L 1 Balance yethod i . . 5 ‘ \\\;\\\u \0 a) 20 :- 0 0 , .. , , i \ j o 20 w, ,,,__,,___._,_,__.l_, _.,,,. ,, , , ., -Ii..-0_.__.__~_-0_i~___l_.__l r3 g x a w\: > 2 I i > Life of 12 Years ‘\* 5 Life of 8 Years1 h 1 ‘ ‘v 1 1 0 L- , “10,000,”...L0.“ _- 0 L -l_-_ll 0 Lo , i, ,. ML», , , ,, - ,, - -0 _ 0 2 u 6 8 10 2 4 6 8 10 12 Age in Years 100 0 .7 , , 100 “ v "‘ ’“7 ’ C!) O O\ O 8 Life of 10 Years Value in Dellars For $100 Initial Cost 5 6 2 1+ Age in 3’15. 5 Relationship Between 80 60 "’ 20 ,,,,,,_,”0,"_-___lu_______l__l.,l_,,_w_,,ww Value in Dollars For $100 Initial Cost Life of 1b Years 5___.._..._--'.._.__._-._.--.J O ...... ‘_____L#,,_-,_‘__J____~_ ____ j... #00— 6 8 10 o 2 I. 6 8 Years Age in Years Value and Age of Farrell "M" Tractor with Different Methods of Depreciation For Straight Line Method. Assumed 10 Percent Salvage Value. 10 1+3 of depreciation. The straight-line method, double-declining balance method and "as is” value are compared for estbmated lives of 8, 10, 12 and 1h years. For the straight-line method it was assumed that the tractor at the end of its life had a 10 percent salvage value. The ”as is" value is the appraised value given in the National Tractor and Farm Implement Blue Book published by National Market Reports, Inc. The ”as is" value is based on the premise that the tractor is in average "as is? condition. _This value is used generally in arriving at a fair trade-in allowance valuation. Many - dealers use it as their absolute maximum allowance figure. From.Figure 5 and from.the definition it is to be noted that in all cases the straight-line method gives a higher value than the double-declining balance. Also, it may be noted that value at the end of the estimated life for declining balance method is within a few dollars of the 10 percent salvage value assumed for the straight-line method. It appears that the double-declining balance method will ap- proach the more realistic "as is” value for estimated lives of 12 and 1h years. It is believed that the double-declining balance method would have more merit than the straight-line method now being used by most cost estimators. This would be particularly true for one who does not intend to keep his tractor or machine its entire life. ’ Since accelerated rate of depreciation is equivalent to a more rapid return of investment to the farmer he may make use of it sooner. Larger farm operators who actually set aside reserves, based on depreciation write-offs, will be in a better position to buy replacements sooner. In cost estimating work it appears that one might be interested in knowing the average annual depreciation to date based on the double-declining balance method of depre- ciation. ‘Hith this in mind, Table I.was prepared to give the average annual depreciation to date for several estimated service-life years. #5 NQOOOF—O‘NOOONQO—iNHOO H m.m m m o. O. 0.m oa.m mm m.m no.n 00.m V 0.m 00.: ma.: .m 0.: ma.: em.: 00.: am a.: 00.: 0:9: mm.: mm 0.: 0:2: 00.: «5.: 00.: H :.: :m.: «0.: 00.: 00.m ma 0.: 0a.: 00.: 00.m 0m.m Hm.m NH a.: 00.: No.0 0m.m mm.m as.m 00.0 as 0.: m0.m 50.0 Hm.m 55.0 :0.0 0H.o ma 0.0 H~.m 5:.0 :a.m n0.o :n.e 0:.0 oo.e :a 0.0 0:.m 00.0 00.0 am.o oo.o :m.o No.5 0:.a ma :.m 00.0 H0.m :0.0 00.0 00.0 em.a ~:.a an.“ we e.m H0.m ma.e 00.0 00.0 an.» as.» wm.0 0m.0 «0.0 He m0m +3.0 0.3.0 H300 owes. hboh .Joem em owew N em. moea OH 000 N‘NOO No.0 “HON. no.“ HNOQ chm “£00 0000 o OOH “GOO-H mNOHH @ m.e «0.0 00.0 0:.5 «cum no.0 :0.0 .0 0m.0. 0~.aa m0.~a 3.0H ~0.~H 0 00.0 0a.o am.» No.5 m: m 0H.0 00.0 00.0H 00.HH 0m.~a 00.ma 0s.ma m:.:~ 0~.ma a mm.e 00.» 00.5 ”0.0 H0n0 :sn0 «0.0H ma.oa a0.HH 0:.ms Hm.:a m~.mH .eH em.sd 0:. a 0 00.0 mm.~ n0.» comm 0:.0 mn.0a 0mn0H am.aa m0.~a o~.:a mm.ma 00.5H :.ma 00.0w oe.wm m on.» so.» 0m.0 no.0 «0.0 00.HH me as mn.ma m0.:a am.e~ m0.aa a~.0H 0H.Hm 0:.mm ma. 0 : 0s.s 00.s 00.0 00.0 00.0H ~5.Ha m:.~a a~.ma mm.ma 00.nd 05.0” n0.am 0:.:~ 05.s~ 00.wm m 00.0 :0.0 0H.0 00 0H NH as 0m NH «.ma 0m.:a ao.oa 00.0w m~.mm 00.m~ am.0~ mm.mm 00.0: m m m mm 0 ma ea .mw :a.. new, 0a 0‘ 0 0 e m 1| endow .. 0.43 coupaom oopgpnm 11 as r 0” azmxsmm>zH o- E o q 90 m I 1“ o L 3 l3— Ei‘ 3* g E- 3 ‘r 14—1 30—7 : O 4 o - t: m i- _ O r- L r- | '5.— 0 40-13: :I: ~_-_ I5 I o 5 50—3-200 : ‘6“ .. +- __ :5 -~ :50 :3 a; 80—: :- 7 :3 90:? — 6 '9'— ‘ «004-100 is C‘l 1E- 90 20—“ JL‘ 80 2|- l3);: 7° 22" fl.— " F180 6. 24.... zoo—L50 A 1L9 FARM MACHINERY COSTS INTEREST, HOUSING, TAXES, INSURANCE flflq~ _ _ _4______+«fi_i_qj::_ n A _ _ .4 _ _ .4 _ _ 5 6 7 O 0 39m .. mm» mmmmeg- e um: J‘ so - 00 I m~.o n. .I .H How m:m «seemed: H mm om.H .I b : H ddadoaeo .m H MN o~.a ma.o mo.m~ I ewe co: sessso a om no.0 flwnw mm.a~ mwummm or: ”mm wmwwmmmz a as O O . H m... mu”... “We... my... .Nm em. £me .. W. N:.H N00 m~.: 0:. wow ma 0 m 0H s O o NO d3 mo.H Adm.m WM.HN mN.hmm W%M mad daem>ahnncmw M “M e®.e ma.m ew.w se.ses now own assess a «A #m H ¢OOOH N00 NIN.OON.H mmm mim “Hgdehflggom H MOOH Haem Nfleom O000$M MMN MJN Hfisommfiz N NH OHOH MJCO ed #dofimd M I dGHHOhdU om HH @000 0 00 NN O®ONMN N: I dflOMdQ e m CH mOOH ”JOOH ONCMH NOONJH mom OOH “poxda cm H 0 N000 @MOMH :meNN mHeHON NMN 30H “HGHwRflM M w QHeH MMOOH OOcmm mNeHOM NGN OJ nonwflfifimd3 m N @000 No: “000 MHONMH WWW SMH “Hflfloomfl3 m ® . an :7 oo.m on.oom om: «scores: m MH H dm.d CO. 0 0mm 0m N 3 co... 00.0 :N m.“ a m: pa... 3.. co.” ago.» .82 .. m . m.~a sexes N a mdm . 00H mxmdhnoz m N chanceha seahom > some H .am\.aao unoo Honk meow hem use» mom as soapqadunoo Honwnoenom aaoo uuoo wwsmmm nmmwm spasm .ma» .0 II H05“ 9 0 HHO HHO HOfim 00D em>< GNHW COHDflOOH CH 0 z owd poo IIII I." Eaton «340 . H (l .e may mo mmHmHN mflmac OMb< ... - .... ...... .. -- N... - . .. m... ...... mm... ...”... .. ...... is... . .. Nmofl No. 50. mo. m ndN OON «hfiomew3 H om H 00.0 .ma .owa NON . com d S d mm do.a . on :: wmn odd «nawaw> m :m rm.a om.m nm.e~ ec.sam men mma axosss.a H mm n~.a e . a .A mo me.oom eem me = A an :Q.O 0.5 NM.0N mm.doN New .om canw>Abnnnom h om cm.” 04.... o:.:m eo.omm 0mm cow . Nassau m em H~.o MN.WM mouam canoes can cam aeswwmmmmem m om .... .... .... ...... ...... ... ...... .. ... mwnw mmnma mcumu oo.ms~ cmm wow hamwwmua H mm 5 N 00 ma 0 oNH ONH nannoenam. m MW showedna noahem w some .h.\.a¢o auoo .33. use» hem use» new anew hem no.8... noaumfisunoo no anoeaom uuoo anon 930m and... modem .MRH Hera oeoo Hao Ado H.3a .sp .m>< seam Coaosoon ew< ammo A.»Qouv >HN mumde 62 .»000 as o . 59 H RON h II nhO»0dhp Ham hon pnoo ado .wbd -.a ......... .ssm on: II c .Am\.ase .m>< cocoon» ass sou esp Husse< .m>< m... - .H . am.h . I so A we as . mo: med . e 000.: 0w om HON “30 a... ...... m... a”... ...... m ......w.... . m e 0N e 0 Gus” mm.“ am.» ww.wa mm.om~ mwm owe oano w mm .... m... .... New... .. .... Amman... . .. e e e I H mm.“ mm.“ ww.mm o.wmm cam can sAsesAwwmmnm M mm 0 O C O o H wm.w ao.m m».mm MN. wmu n m wmm seemeeceo m em .3 OH HO.“ NOON OOCWMd QHM I QOCGHZ N 0.: mmed ooHo m.” GeoomN OON mmN GamGMMWMM H m: o». H MM.M WWHRM o:.ms~ mwm mew essaesn m Wu mm”. mo. ma ma.nm mm.wum mom so. Hewmmmww_ H m: “wow 00. o m. 0.300 oOCM@H NW.“ OMH dfldgc ...—n.~ dd eo.a mm.m mmumw mm.mwm mom omm .cecso H mm c e e 0 “30 so N no m me as a moJoem e ”mm WWW essesecw m we unoposaa common a case HonaaHH m 0 .am How puoo Honk ace» hem use a . noapdAWanoo mo unoeaom puoo ”comm asmwaMMA mmmw< ouapm .maw .oz doom anon Hao ado atom on: .m>< swam coupeeoq mm coco IIII < ..oeoo. >Hx mgmanb ..aoen .wcw .odhwd .ceaousm .m .m «seen no condom .nhsom 0mm cub Hdfidfld omoao>< .odma on cmoa ooahom on» you nhoaoeha sebum no dfiOhu sou been one ovooo hwsaom hoaosha noozaom ouSnQOHQsAom .HH .mam mnmow a“ oww NH 2 m e a N o T\\\\¢\\|ll o o\ 4 JW\\\\\ if \ m \\W o o NH Meow N $8 82 mo u w H0.H N :Hm.o n M II 4303 men go queoaeg U: 4903 xtedog 20.0 15 .0 10.0 9.0 8.0 7.0 6.0 5.0 II..O 3.0 Repairs in Percent of Initial Goat 2.0 1 5 Log Y=Log 0.3114 +1.61 3' X Y B ‘% or Initial cost x . ear in sti 1.0 0.9 0.8 067 _ 0.6 Standard bror :0. 005 ~ Correlation Coefficient 0. 0.1.. ‘ 1 4'2 ‘S h“ 536'7‘8910 “lg"? in Hedi-*3. Fig. 12. Relationship BeWeen Tractor Repair Costa and Use for Group of Seven Tractors for the Period 1936 to 1914.6. Average Annual Use 550 Hours. 6S 66 The standard error of estimate was calculated to be 1 0.133 percent and the correlation coefficient was calculated to be 0.97. ‘ Although the average repair costs were larger for the hth_andAZth.year, Bateman reported that there is no definite pattern as to the year of first large repair cost for indi- vidual tractors. Consequently it is believed that the analy- tical relationship as indicated is valid. The data for the seven tractors is based on continuous records kept on grain farms in Champaign County, lllinois, and that practically all the engine repairs were made at a machinery dealer by a skilled mechanic. Additional information regarding repair costs were re- ceived from.Pfost (1955). The data is summarized in Table XV for different groups of machines and tractors. It was determined that maintenance labor costs range from.S.88 per- cent to as high as 33.20 percent of the total maintenance costs for the harvesters and corn planters for the years in- dicated. Maintenance labor costs for the diesel tractors varied from.22.87 percent to 71.51 percent of the total maintenance costs. Maintenance labor costs for the gasoline tractors varied from.25.87 percent to 36.03 percent of the total maintenance costs. ' Figures 13 and 1h which show the dependence of mainten- ance costs on use for sweet corn harvesters indicate that the relationship is approximately linear. Since all 33 vaMJ I d— ffiifusfulrhl ‘- lefK AMI III- TABLE XV SUMMARY OF MAINTENANCE COSTS AND USE DATA Source of Data: 67 Green Giant Company, LeSueur, Minnesota _flaintenance Costs Year Material Labor Total Avg. Cost 12:32:31; Per Acre of Total swans CORN HARVESTERS Plant 3* 1951 t 123 t 12 s 135 t 0.15 8.89 1952 . 382 95 177 1.59 19.92 1953 35 176 530 1.77 33.20 1951 15 130 588 1.96 22.10 Plant H" 1951 107 38 115 0.18 26.21 1952 269 70 339 1.13 20.65 195 227 95 332 1.11 28.61 195 111. 103 517 1.82 18.83 313.0. CORN PLANTER - 1;aou*** 1952 16 1 17 0.031 5.88 1953 ‘31 12 13 0.086 27.90 1951 72 29 .101 0.202 28.71 MIL MD morons Plant H**** $3§',2§§t 1952 23 57.75 80.75 0.083 71.51 1953 212 71.75 313.75 0.322 22.87 1951 201 127.75 328.75 0.337 38.85 MENNEAPOLIS-MOLINE MODEL UTU TRACTOHS giant Passes 1950 76 35.00 111.00 0.091 31.53 1951 205 108.50 313.50 0.265 3 .60 1952 171 98.00 272.00 0.229 3 .03 1953 295 117.25 112.25 0.318 28.11 1951 351 122.50 173.50 0.100 25.87 —‘ *Average costs for 12 units and harvested a proximafgfy 300 acres per year per unit. Assumed labor at $ .00 per hour. Purchased 1951. *flAverage costs for 2l units and harvested approximately 300 acres per year per unit. Purchased 1951. (table continued next page) 68 mAverage of two h-row corn planters, model 1110, purchased 1952, average per unit per year 500 acres. *eaeAverage of 3 Diesel tractors. Annual use 975 hours. Purchased 1952. §****Average costs for three gasoline tractors. Average annual use llBS hours. Purchased 1950. Annual Cost in Dollars Source of Data: Greeaniant Company Le Sueur, Minnesota an Total 509 V Average Annual Use 300 Acres Pe Unit 9 / 1400 , / / Material M / / ' 300 7’ 1 I I ’ 1 AK‘\ / I / ‘ \ \ J , / d i 200 / i j / / i I // . / ///7/ § 100 JV _ __ 11...: / ' / r-f" if g / , 1’”. g t / / \ I a ’ lawr / / I //‘F/ 3 i o l 7 C 1 2 3 h 3 Age in Years 1951 195 2 195 1951 Year Fig. 13. Relationship Between Total Maintenance Costs and Use for Twenty-one Sweet Corn Harvesters at Plant H. Annual Cost in Dollars 70 Source of Data: Green Giant Company Le Sueur, Minnesota 600 __ J Averag Annual U a 300 ores per tnit Toad. 500 / A / i / Material hm / 11 I‘ / / fit 1 2 ‘ , ’ / \ ‘ ’ / 300 I , . I E ’ i I, g i 200 g g / % I I; \ / g \\\‘ / i fig / / E Labor F 4 s / ' g / 5 / i - "i a z 1 2 3 '“§ 330 in Years 1951 1952 v 1953 195k ..«gar Fig. 11. Relationship Between Maintenance Costs and Use for Twelve Sweet Corn Harvesters at Plant B. 71 harvesters were the same model, size, and had the same amount of duty except that 12 were operated at one plant and 21 were operated at another plant, the sets of data were combined and plotted as shown in Figure 15. Analysis of the data resulted in a regression line, 1 . 0.182 + 0.1261 where Y It cost per acre in dollars and X 8 the year in question. The standard error of estimate was calculated to be 10.251 dol- lars, and the'correlation coefficient to be 0.88. For more conclusive evidence data for more years of ‘servicc is needed. Figure 16 which shows the relationship between maintenance costs and use of corn planters for the three years reported tends to indicate that maintenance costs increase at an in- creasing rate. The regression line for corn planters was not calculated due to insufficient data. Pfost (1955) stated that assuming labor cost for the her- vesters and corn planters at $1.00 per hour is considered real- istic. The labor cost for tractor maintenance was, however, running approximately $1.75 Per hour. An investigation made in person on the maintenance costs of different groups of tractors from the files of the Seabrook Farms located at Bridgeton, New Jersey, revealed the following cost data for material and labor as summarized in Table XVI. These data indicate that labor costs represent from 11.71 percent up to 76.17 percent of the total maintenance costs. Cost per Acre in Dollars 2.50 2.00 ...I e \n O 1.00 0.50 72 Y - 0.182 + 0.126x Y 8 Cost per acre in dollars x = Age in years Correlation Coefficient 0. 8 l 1 ///r ? Standard Error +0.25 1 l 1 2 3 1 5 Age in Years Fig. 15. Relationship Between Maintenance Costs and Use for 33 Sweet Corn Harvesters at Green Giant Company, Le Sueur, Minnesota. Annual Cost in Dollars 120 100 80 10 Source of Data: Green Giant Company Le Sueur, Minnesota 73 Averagt Annual Ute Acres per Unit 500 Total {A / Material I 3 / / / / 1*? a ///,/ d! e ’ /7’ a / Labor 63/” ! F18. 16c Costs and Use for Four 1H0 Four-Row Corn Planters. 1953 Year 3 Age in Years 1951 Relationship Between Average Maintenance TABLE XYI 78 SUMMARY OF TRACTOR MAINTENANCE COSTS AND USE DATA Source: Seabrook Farms, Bridgeton, New Jersey A Maintenance Costs . 0 Year Material Labor Total 82% HOS? 3:32:11??? Total * 1950 3 39.86 e 10.37 8 50.23 c 0.091 20.6 1951 6 115.57 32.32 117.89 0.268 21.85 1952 161.05 11.65 208.70 0.359 21.39 1953 191.83 25.11 217.27 0.520 11.71 1951 255.05 12.99 298.01 0.567 11.12 as 1950 17.60 .. 17.90 0.023 - 1951 115.31 19.83 195.11 0.238 25.51 1952 159.85 11%.62 601.%7 0.776 23.93 1953 8.91 2 .96 37. 7 0.016 76.17 1951 107.58 117.19 251.77 0.631 57.77 m 1951 79.32 50.03 129.35 0.139 38.68 1952 85.89 108.53 191. 2 0.205 55.82 1953 163.02 97.61 260. 6 0.281 37.16 1951 187.86 121.11 309.26 0.311 39.26 a... 1951 16.11 8.75 25.19 0.035 32.71 1952 70.05 10.59 110.61 0.152 3 .69 1953 85.02 16.27 131.29 0.211 35-24 1951+ 86.52 65.87 152.39 0.363 13.22 *Average costs for 6 Farmall M tractors operated on gasoline Purchased in 1950. Average annual use was 525.5 hours. Caterpillar D—h Diesel tractor pur- **Average costs for one 713.8 hours. chased 1950. Average annual use iver "88" Diesel tractors purchased a was 908 hours. esel tractors purchased ***Average costs for 12 01 in 1951. Average annual us ****Average costs for 3 Oliver "77" Di 1951. Average annual use was 622 hours. k ‘-- 75 Examination of Figures 17 and 18 indicate that the rela- tionship between maintenance cost and use for the groups of tractors studied might be approximated as linear; however, more years of use are needed for reliable conclusions. From the results obtained thus far one suspects that the east figures from the Green Giant Company and Seabrook Farms are more realistic in that all labor costs including those needed for servicing the equipment are included, whereas the Illinois data includes only labor cost for repairs and does not include all service costs associated with the tractor. Since the Illinois data covers a greater span of years and more hours of use, it would probably be more reliable for cost estimating purposes until more data is accumulated on the commercial farms. Annual Cost in Dollars Source of Data: Seabrook Farms Bridgeton, New Jersey 76 ‘V9P38 Annual U c 622 Hours per Tractor 200. Total 150 —~ // 3‘ 0/ 100 .... / , Ar- - - - - 4r / ’ ’ Material , , /T 50 MN- r1 1 - l J 1 ’ t""-"— Labor 7] // ’ /‘l T, 1 / I // , 4? I O J ’ I. / 0 1 2 3 b 5 Age in Years , 1951 1952 1973' 1951 Year F18. 17. Relationship Between Average Maintenance Costs and Use of Three Oliver "77? Diesel Tractors. Annual Cost in Dollars 39) 77 303 Total 250 2a) —— //j 150 —— . ‘/, Material I ./ / / I / ,/’ Labor :L‘~._ ,/” / [I W, — So ce of.Dat : eabrook F idgeton, New Jerse F180 18. Costs and Use for Twelve Oliver "88" Diesel Tractors. I 2 3 1 5 age in Years 1951 1952 1953 1951 Year Relationship Between Average Maintenance 78 Part VI Development of a Technique for Estimating When a Farm . Machine is No Longer Economical to Operate Once a farmer purchases a farm machine he will at some future date be faced with the problem of making a decision when to replace it'with a new or more modern machine. When to Justify replacement of a machine is a controversial ques- tion among farm operators and depends upon their Judgment for determining when a machine is in need of replacement. Even large commercial farming operators depend only upon intuitive Judgment for determining when a machine is in need of replacement. It is therefore of great concern that a more scientific means of approach be worked out whereby one can determine the time when a machine is no longer economical to Operate. There are two basic reasons for replacement: (a) when 8 machine ceases to function physically, or (b) when it does not provide service as economically as a replacement. The idea of replacement should occur when it is most economical rather than when an item of equipment is worn out, appears to be contrary to the fundamental concepts of thrift to many 990910. People tend, to feel secure with familiar equipment and to be skeptical in regard to change, even though they may Profess a progressive outlook. as“. s'V“\ 79 Replacement probably should be thought of as a method of conservation; that is, conservation of effort, energy,. material and time resulting from replacement. Therefore, the causes for replacement might involve one or more of the following: (a) Excessive1maintenance (b) Inadequacy - capacity not adequate, thus resulting in untimeliness of operation and loss of returns from.crop due to reduced yield and quality. (c) Obsolescence - owing to improved design of newer equipment. ((1) Reducing efficiency - resulting in loss of crop, _ higher fuel and oil consumption, etc. (e) Ability of new machine to combine a number of distinct operations to be done by one machine. (f) High resale value for old machine. (3) Greater returns per dollar invested. (hi Pride of ownership of new machine. (1) New machine more dependable and easier to operate. Some methods which have been advocated and used for making “Placement determination in industry, as designated by their replacement criterion, are: 1. Replace every X years or Y hours. This method has the- disadvantage that the costs involved in operating the r total hours of machine are not solely a function of age 0 g conditions, skill of operator and kind use, since operatin ..it {wrfifl .1uVe " " EC QXCC‘ I’m ... a AMV 80 of maintenance will influence the operating costs. It also ignores the price and productivity of the new machine. 2. Replace when the machine is fully depreciated. The disadvantage of this method is that the rate of depreciation used may not be the true value and does not take into consider- ation the increased maintenance cost due to excessive use and poor maintenance. 3. Replace when the maintenance cost of old machine J exceeds the depreciation charge of the new machine. This method is based on the fact that direct operating costs such as fuel, lubricants, and other incidentals will be the same for the new machine and the old machine. This may not be true for a particular machine. It also assumes that the rate of depreciation is the same for the new machine as for the old machine, which may not be true. ’4. Replace when the unit cost of the old machine is lowest. The chief disadvantage of this method according to Dean (1914.8) is that the point at which decline of depreciation cost is just canceled by the rise of maintenance and other costs, has no economic significance except when compared with an alternative course such as average life cost of new machine. 5. Replace when the machine is "worn out" beyond repair. This method does not appear to have any reasonable justification Bince with modern methods of maintenance a machine can be made to run almost indefinitely by merely replacing or rebuilding worn parts. COS yie 2&6 eve CE: (,1 ' h. 81 6. Replace when expected machine costs (capital and Operating) .during the next year are higher than average annual costs (capital and operating) of a new machine sufficient to yield an adequate costs-savings return. Dean (1914.6) calls it the capital earnings method and highly recommends it. How- ever, he says this method also has limitations and that it can have errors in projecting costs into the future. This method requires training in economic analysis and capital budgeting. a Method for Determining When a Tractor is No Longer Economical to Operate The method that will be proposed here might be called the minimum-cost method. The criterion for this method is the theory of maximum profit as used by production economists. Hhen the marginal cost equals the average total cost, a point has been reached on the production function curve which is considered to be the maximum profit point. It should be I noted that when this point is reached the average total cost curve will be at a minimum. Bradford and Johnson (1953) make the following statement: / The fundamental economic principle with respect to the profitable use of machines is the same as that with respect to other production factors. One must equate the marginal cost of using a machine with its marginal value product. Marginal returns include labor saved, value of marginal physical product, timeliness, and increased quality of product. 82 In applying the above criterion to tractor costs it is assumed that the marginal returns (output) from the tractor remain constant. This assumption is reasonably correct when the tractor is kept in good repair, used a constant amount each year and that the jobs it performs are timely. It is believed that when the average costs become equal to the mar- ginal cost a point has been reached where one needs to make a decision regarding replacement. Marginal cost is defined as the increment of cost added to total costs as a result of raising the level of output by one unit. Mathematically it is defined as the slope of the total cost curve. Arithretically. marginal COStS can be calculated by dividing the increase in either total or variable costs by the increase in output which results from the ad- dition of inputs to production process. This method does not give exact marginal costs but is the average marginal unit cost for the range of the increase in output. For determining exact marginal cost it is necessary to take the first derivative of the total cost curve. It should be pointed out that the marginal cost curve Will always intersect the average variable and average total cost curves at their minimum point. In order to demonstrate the proposed method for esti- mating when a tractor is no longer economical to operate,the following assumptions were made: 83 Depreciation_was based on the average ”as is" appraisal values as given in.National.Tractor and Farm Implement Blue Book. To be.more accurate one should take the current appraisal values in the area of use. Interest on investment was assumed to be six.percent and was charged off each year on the undepreciated.balance. In- terest is assessed at the end of the year, but the balance of the investment on which it is calculated is that which stood at the beginning of the same year. ‘Insurance was assumed to be one percent. Actually the rate for insurance might better be taken as some fraction of one percent. {235g2_were assumed to be two percent. The rate, of course, will vary with.the locality. Taxes are based on some percen- tage of the actual value. The percent of value used in Table XVII is that suggested by the Michigan State Tax.Commission for Tractors. Repairs are based on the values suggested in Figure 11 for the seven Farmall “M" tractors. Table XVII shows the cost factors used for determining when the tractor is supposedly no longer economical to operate. The table was prepared in such a way that all cost figures are based on an initial in- vestment of $100. Table XVII does,gbt include all costs involved when es-K ‘ timating total cost of operating tractors. The other costs are fuel, oil, lubrication and daily service, and housing. 8b, ea.na am.ea oo.Na o:.o ON mN.o :.H :a.m N. a .oN oa owned ee.ea oe.ea om.o mN eN.o e.s em.e H.ms mm.sN e oN.eH as. as oo.o 00.0 on mn.o oo.N em.: ”.ms eo.mN e 5:.ma we. as on. m os.o mm mm.o mN.N om.s e.Na Nm.mm a am :a 0:. ma o~.m om.o o: m:.o nm.N oo.m e.aa NH.mm e um.mn as. ea 8.: 00.0 m: 4.0 Ho.N nm.m H.HH Na.m: m Nm.ma om.oN oo.N oo.a om m.o mN.m me.m :.0H amuse m ao.Na om.NN om.“ oH.H mm om.o mm. m mo.m mum ma.:m N comma on. mN oe.o on.a me no.0 mo.s awumm m.NM ww.mw a or oi; 8. 3e omen cm; a ma. 8. a o 8. e a wee o.o 8.03 a 0 race open es s «a. useaa.n neee an arena osae> e. 0 lilillxutnwnm sees an? a e an... .232 in E seize.” . the. N cones - a = 3 ago“ Ema x0 me as nuaemmmo excesses 2. < amusesm memmzoasqamm awed; m¢§< 20 a; Bmoo jZHOE Q HH>N uqmqa 24 sacm Mo adoa a no afieaom owdhcbd dad pmou undue o u oven 0» umoo m ashamed: coospom ashesoepeaom .on .waa use». mo cam NH 0H m o a m o A . . _ o .930: Hmm can Hagan emgmbd .03”? Hosanna“? :3 as. omoaobm no moms. coapeaooaaon "@502 m a A \A. gel kind ..I In? I! .III \ . .14 I 1- Tilt]; ON .1 -..-lnr. [l/ f open op pwoo owmao>< lo. .. loll xx umoo Henchman: v 1 om o: L L\.\.\L a entel Imam :0 0013 19d smxoa at me; .194 9,909 41! a. six cos lca H. L.; .‘J ‘ n1 87 The question often arises whether the purchase of a second-hand tractor would be cheaper to operate than a new one. Figure 20 shows the relationship of average cost to date and marginal.costs for a tractor purchase new and a second-hand tractor purchased at different ages. It is of interest to note that the second-hand tractor will operate at a lower average cost up to and including the six year old. The primary reason for this result lies in the fact that the higher depreciation rates in the early years have a greater influence on costs than do the maintenance or repair costs. It may also be noted that a three year old tractor will operate at the lowest average cost. The marginal cost curves for the second-hand tractors were assumed to fol- low the same trend as the new tractor for the years in ques- tion after the first year of use. In.genera1 it might be stated based on the results in Figure 20, that from an economic point of view a three year old tractor would provide the lowest average operating cost bUt probably should be kept for a shorter period of time than a new tractor. as In actual practice, however, a farmer generally purcnas t for a tractor to operate for several years of service and no resale purposes. d the From.the foregoing analysis it appears that the me nomi- Proposed for determining when a tractor is no longer see ' t rs 081 to operate would consider primarily the fee 0 Cost Per Year in Dollars Per 3100 of Initial Value 1:5 to 35 30 25 20 15 10 88 Costs for a Tractor Purchased New and Second-Hand. 0 , New v r \ . \ \ ‘\ 5 :- Jiarginal Cost \ — --— —e— - Average Cost to Date 1 1 Figures encircled indicate age at which second-hand tractor was purchased. 1 ———_ 0 2 b 6 10 12 Age in Years Fig. 20. Relationship Between Average and Marginal Repair 89 (a) obsolescence, and (b) excessive maintenance. This method will have limited use since it does not account for factors such as reliability, inadequacy due to size, improved effi- ciency resulting from better design of new machine, labor saved, personal desires such as better comfort and other pos- sible hidden cost savings which one might realize with the replacement of a new tractor. We are also assuming that the new tractor will follow the same rate of depreciation and maintenance reouirement, which is not necessarily true. It is believed, however, that past performance records for re- pair costs for various types of equipment are quite useful in predicting the maintenance costs of future machines. cepr BE 90 COHCLUSION S 1. It appears that the declining balance method of depreciation as suggested by tax legislation for income tax purposes might also be used for estimating cost of depreci- ation for farm machinery when the exact amount is not known for estimating cost of operating machinery. This method tends to give a more realistic value than the straight-line method of depreciation which is commonly used. 2. The method used for determining assessment schedule for taxes of farm equipment is not consistent among the states studied. 3. Repair and maintenance cost data from the commercial farms, Seabrook Farms and Green Giant Company tend to indi- cate a linear relationship between total maintenance costs and use for the years studied thus far; however, more years of service or hours of use are needed in order to get more con- clusive evidence. LL. Results of a study of repair cost data on seven trac- tors taken at the University of Illinois for a period of ten years indicate that repair costs increase at an increasing rate according to the relationship Y II 0.31.11.11'61 where Y is repair cost in percent of new cost, and X is the year in question. This relationship is valid only for an average annual use of 550 hours per year. 91 5. A method was worked out for estimating the approxi- mate time when a tractor should be replaced or is no longer economical to use. Resultsfor group of tractors purchased new and operated an average of 550 hours per year indicate that they should be replaced at the 9th or 10th year. 6. For second-hand tractors, it was observed that a three year old tractor would give the lowest average operating cost due to the high rate of depreciation during the first two years of use. 7. It is believed that more detailed information is needed on how repair costs vary with use for the various farm machines since it is one of the important factors which determine when a point is reached beyond which the machine ceases to be economical to operate. Past performance data of certain machines is probably the best known source of in- formation for predicting behavior of future machines. h bk Aw AI‘ E PAL 92 REFERENCES CITED Anonymous (1914.6). How to figure operating costs of farm machines. .Extension Service. South Dakota State College. Extension Leaflet 100, June 19146. Anonymous (1952). Pennsylvania Farm Economics, Pennsylvania StateCollege Agricultural Extension Service, Number 11.6, Bpp. Anonymous (19514.). National Tractor and Farm Implement Blue Book. National Market Reports, Inc., Chicago, Illinois. “08 PP. Barger, E. L., W. M. Carleton, E. G. McKibben and R. Bainer (1951;). Tractors and Their Power Unig, John Wiley and Sons, New York. 74.96 pp. ' Bateman, H. P. (1914.3). Effect of full load on farm machine operating economics. Agricultural Engineering 21;:111-1114. Bateman, H. P. (1951+)o Associate in Agricultural Engineering, University of Illinois. Personal correspondence, June 7, 1951+. Bateman, H. P. (1955). Associate in Agricultural Engineering, University of Illinois. Personal correspondence, February Ill. 1955- Black, J. D., M. Clawson, C. R. Sayre and W. W. Wilcox (1951). Farm Management. The Macmillan Company. 1073 pp. Bradford, L. A. and G. L. Johnson (1953). Farm Man ement Analysis. John Wiley and Sons Inc., New York. H33 PP. Davidson, J. B. (1931). ggricnltural Machinery. John Wiley and Sons, New York. 396 pp. Davidson, J. B. and S. M. Henderson (19h2). Life, Service and the Cost of Service of Farm Machines on LL00 Iowa Farms. Iowa State College.Agr. Expt. Sta. Bul. P. 37. Day, C. L. (1951). Hay and ensilage harvesting costs. ' Missouri Agr. Expt. Sta. 1fiul. 561. 20 PP- Dean, J. (1914,81. How to determine when a motor vehicle should be replaced. SAE Quarterly Transactions, 2:518-531. Benet] Bend Kit ‘I T (he: 93 Doneth, John C. (19514.). Michigan Farm Business Report, Michigan Quarterly Bulletin, Vol. 37, No. 2. Pp. 261;- 272. Fenton, F. C. and G. E. Fairbanks (1955). The cost of using farm machinery. Kansas State Engineering Experiment Station. Bul. 711, 14.8 pp. Frick, G. E. and S. B. Weeks (1951). When to hire and when to own farm equipment on New England dairy farms. University of New Hampshire Agricultural Extension Service. Extension Cir. 302. 11 pp. Hendrix, w..E. and w. T. Fullilove (19u21. Labor and Power Needs on Crops in. Bullock County, Georgia. ' Georgia Experiment Station, Circular 139, 15 pp. Hertel, J. P. and Paul Williamson (19141). Cost of farm power and equipment. Cornell Agr. Expt..Sta. Bul. 751. 33 PP- Kalbfleisch, Wm. (1950). Cost of Operating Farm Machinery. Department of Agriculture, Ottawa, Canada. Publication 750. 36 pp- Kitchen, D. A. and L. F. Larsen (1952). Which Fuel for Farm Power? Extension Service, University of Nebraska. E. C. 762, 2 pp. McKee, Dean E. (1953). Scale associated with decreasing costs in cash grain farming. Thesis for degree of M. 8., Iowa State College, Amos. (unpublished) North Central Farm Management Extension Committee (1955). Farmers' 1955 Income Tax, Michigan State College. Agricultural Economics Department, Extension Bul. 257, 32 pp. . Pfost, H. B. (1955). Division Engineering Manager, Green Giant Company, LeSueur, Minnesota. Personal corres- pondence, January 2h, 1955. Richey, C. B. (1950). Crop Machinery Use Data. Agric. Engineering Data 2, American Society of Agricultural Engineers, St. Joseph, Michigan. 7 pp. Samsel, L. G. (l95h). Educational Division, J. I. Case Company, Racine, Wisconsin. Personal correspondence, November 19, 1951;. Thompson, J. L. and A. Wenhardt (1952). Cost charges on agricultural machinery. Experimental Farms Service, Dept. of Agric., Ottawa, Canada. Publication 881, 13 pp. m1 9h Vary, Karl A. (195b,). Hay harvesting methods and costs. Mich. Expt. Sta. Spec. Bul. 392. 35 PP. Williams, D. G. (1936). Economical length of time to keep a tractor. Agricultural Engineering, 17: 25h. Worthington, N. H. (1951). The economic evaluation of farm tractor fuels. Agric. Eng. 32:11.73-1476. 95 OTHER REFERENCES Aginsky, L. N. (1929). Method of calculating number and size of tractors required for given condition. Agri- cultural Engineering 10:169-171. Barger, 5. L. (l9hU). Engineering management aspects of self-propelled.farm.machines. Agric. Engineering Byers, G. B. (l9h6). Costs in owning and operating farm implements and machinery in Kentucky. Kentucky Agr. Expt. Sta. B1110 (4.514.. 22 pp. Doyle, L. E. (1950). Tool Engineering. Prentice-Hall, Inc., New York. #99 pp. Epp, A. H. (1952). Cost of operating machinery on.Nebraska farms. Nebraska Agr. Expt. Sta. Bul. #13, 8 pp. Gowder, M. T. (1935). Ownership and operation.versus custom work. ‘University of Tennessee Agricultural Extension Service. Cir. Bul. h23, 15 pp. Gunlogson, G. 5. (l9hh). Some concepts of farming efficiency. Agricultural Engineering 25:369-371. Heady, E. O. (1952). Economics of Agricultural Production and Resources. Prentice-Hall, Inc., New Xork. 850 pp. Hoelscher, E. P., J. N. Arnold and S. H. Pierce (1952). Graphic Aids in Engineering Computation. McGraquill Book Company, Tnc., New lork. 197 pp. Larson, G. H. (195A). Liquefied petroleum gas for tractors. Kansas State Engineering Experiment Station. Bul. 71, (+0 pp- _McKibben, E. G., and A. P. Aglibut (1932). Some factors af- fecting the economic use of tractor engines at part loads. Agric. Eng. 13:73-7h. Milligan, D. A. (l9h2). How to increase farm.production with reduced manpower. Agric. Eng. 23:309-311. Mundel, M. E. (1950). Motion and Time Stugy. Prentice Hall, Inc., mew York. M57'pp. 96 Nathan, K. (19MB). An Economic Study of Combines. Agric. mg. 30:27“. Terborgh, G. (1914.9). Dynamic Equipment Policy. McGraw-Hill BOOK 00., New Xorke 290 Pp. ROOM base Mi Q 9:: \, 0.321 Apr Demco-293 "7'11111‘11111'111’1T