Question

If the annual fixed cost of a tractor operating a mould board plough is Rs 90000, the variable cost Rs 500 per hour and custom hiring market rate is Rs 700 per hour. The calculated annual break even hours of use of the tractor is

• A. 250 hours per year
• B. 350 hours per year
• C. 450 hours per year
• D. 550 hours per year

Hint:

Break-even hours = $\frac{\text{Fixed Cost}}{\text{Margin per hour}} = \frac{90000}{200} = 450\text{ hrs/yr}$. Above 450 hrs, ownership is profitable.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Break-even analysis in farm machinery economics determines the minimum annual hours of operational use at which owning the machine costs exactly the same as custom hiring.
Key Formula or Approach:
\[ \text{Break-Even Hours } (H) = \frac{\text{Annual Fixed Cost } (FC)}{\text{Custom Hire Rate } (C) - \text{Operating/Variable Cost per hour } (V)} \]

Step 2: Detailed Explanation:
Given parameters:
- Annual Fixed Cost: \(FC = \text{Rs. } 90,000\text{ /year}\)
- Variable Cost per hour: \(V = \text{Rs. } 500\text{ /h}\)
- Custom Hiring Rate per hour: \(C = \text{Rs. } 700\text{ /h}\)
At the break-even point:
\[ \text{Total Cost of Ownership} = \text{Total Custom Hiring Cost} \]
\[ FC + (V \times H) = C \times H \]
\[ FC = (C - V) \times H \]
\[ H = \frac{90000}{700 - 500} = \frac{90000}{200} = 450\text{ hours/year} \]

Step 3: Final Answer:
Therefore, the annual break-even usage is 450 hours per year, corresponding to option (C).