Custom Rate Calculator

It's modeling the average investment outstanding over the equipment's ownership period, not the price at purchase: as depreciation reduces book value year over year, the average balance you have capital tied up in works out to roughly half the original value over the full ownership span. Charging interest on the full purchase price every year would overstate the true opportunity cost of the capital.

Ownership costs — depreciation, insurance, interest, and housing — are fixed annual amounts that don't shrink just because the machine sits idle more; the calculator divides that fixed total by annual hours of use to get an hourly ownership cost, so fewer hours means each hour absorbs a larger share of the same fixed bill. This is why high-value equipment used only a few hundred hours a year tends to carry a much higher per-hour cost than the same machine run heavily.

It first sums ownership, operating, and labor cost per hour into a base cost, then multiplies by (1 + overhead%) to load on administrative and insurance costs, and only after that does it multiply the overhead-loaded figure by (1 + profit%) to add margin. Because profit compounds on top of overhead rather than on the raw cost alone, raising your overhead percentage also slightly increases your dollar profit, not just your covered costs.

It answers a different question than the per-acre rate does: given your total annual ownership and operating costs and the rate you're charging, how many acres would you need to custom-farm in a year just to cover those costs with zero profit left over. If your realistic annual custom-work volume falls well short of that number, the equipment investment isn't being justified by the custom-hire income alone, even though the per-acre rate itself looks profitable on paper.