Minimize Your Fixed Cost Amortization to Maximize Your Profits

• February 9, 2010
• Paul Neiffer

To maximize your profit for your farm, it is very important to determine what your annual fixed costs are and determine if you are maximizing your amortization of these costs on your farm.  Fixed costs are those costs that do not materially change with production increases and decreases. 

 

Some examples of fixed costs are:

• Depreciation on your equipment
• Insurance costs on equipment
• Your annual salary cost for providing services to the farm operation
• Office related costs
• Other annuals salaries for workers who are not at full capacity

These costs are mostly fixed and if you can increase your production to full capacity, these costs per unit of production will decrease substantially.  The goal is to maximize your production to equal the full amortization of these fixed costs.

Lets say you have a farm with 1,000 acres of production and your total annual fixed costs are $100,000.  This means your average fixed cost per acre is $100.  If you have enough equipment and capacity to farm 2,000 acres and all of your variable costs will remain the same, you will reduce your fixed cost amortization from $100 to $50.  This will result in additional profits to the farm operation of $50,000.

Try calculating these costs for your farm operation and see how it would effect your bottom line.

However, you also need to be careful that as you approach full capacity, you may have to make major investments to go slightly over full capacity.  This can then put your back with higher fixed cost amortization.

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