If fixed annual costs increase, the minimum acres required to justify buying the combine will:

If fixed annual costs increase, the minimum acres required to justify buying the combine will:

• A. Increase
• B. Decrease
• C. Stay the same
• D. Cannot be determined

Answer: (A)

When deciding whether to buy versus rent, you look at the break-even point where owning becomes cheaper enough to justify the purchase. This break-even acres equals the fixed annual costs of owning divided by the annual savings you gain per acre from owning (instead of renting or using a less efficient method). If fixed annual costs increase, that numerator goes up, so you must cover more of those costs with production. In other words, you need more acres to spread the higher fixed cost over enough production to make buying worthwhile. That’s why the minimum acres required to justify buying the combine increase.

When deciding whether to buy versus rent, you look at the break-even point where owning becomes cheaper enough to justify the purchase. This break-even acres equals the fixed annual costs of owning divided by the annual savings you gain per acre from owning (instead of renting or using a less efficient method). If fixed annual costs increase, that numerator goes up, so you must cover more of those costs with production. In other words, you need more acres to spread the higher fixed cost over enough production to make buying worthwhile. That’s why the minimum acres required to justify buying the combine increase.