Depreciation on a Time Basis
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IHAVE been asked to deal with the problem of quoting for municipal hire, giving current figures for costs and charges for both platform lorries and tippers. Before coming to this subject, however, I propose to discuss depreciation, because the placing of that item and the method of its calculation have a particular significance in connection with this class of work.
There are many ways of dealing with depreciation, and each has its application. For my present purpose, the reckoning of rates, there are only three ways and the selection of the one to use is important. If the wrong method be applied, the haulier may lose a proportion of his legitimate profits.
The three methods are: to treat depreciation altogether as a standing charge; to treat it completely as a running cost; and, a compromise, to allocate one-half to standing charges and the other to running costs. ,
Take a simple case in which the amount to be used as a basis for the calculation of depreciation is £1,000. First of all, assume that the whole of the amount is to be put down as a standing charge. • The period over which the £1,000 is to be written off is five years, so that £200 per annum, or £4 per week, is the amount to be included in the standing charges. The running costs are not affected.
Varying Debits
Now, if the vehicle be engaged on a contract involving only 200 miles per week, the amount to be debited per mile on account of depreciation is £4 divided by 200, 4.8d. If -the operator adds 25 per cent. for profit, he should then receive 6d. per mile to cover depreciation, equivalent to £5 per week. On the other hand, if the vehicle runs 800 miles per week and the depredation still stands at £4, the cost per mile for depreciation is 1.2d., and the charge 1.5d.-still £5 `per week. There is obviously something wrong here, for it cannot be right if a haulier earns £5 per week on account of depreciation when running 200 miles per week that he should receive no more if the vehicle runs 800 miles per week.
Let us take the second method and enter the item as a running cost.Assume that the vehicle is to be depreciated over 160,000 miles. That involves a cost of 1/d. per mile. If we add 25 per cent. for profit, the charge is lid. per mile. This will be unaffected by the mileage run per week, so that if the vehicle covers only 200 miles in that time the revenue will be 200 times lid., £1 1 ls. 3d. On the other hand, if the vehicle runs 800 miles per week, the revenue will be £6 5s. According to this method, the haulier will earn an insufficient sum if the vehicle be doing a low weekly mileage, although he will probably be satisfied with• his revenue if there be a large mileage. .
Now the third method in which the depreciation is split. First take one-half of the total amount, £500, and depreciate that over five years. The amount is £100 per annum, or £2 per week, and if the operator adds 25 per cent. to that for profit, his revenue should be £2 10s. per week. Take the other £5(10 and spread that over 160,000 miles and we get 'Id. per mile as the figure for depreciation to be applied as a running cost. Add 25 per cent, to that for profit and we get 15/16d. If the vehicle runs 200 miles, the running-cost depreciation adds up to 15s. 71d. The revenue on account of depreciation as a standing cost, £2 10s., plus that reckoned as a running expense becomes £3 5s. 71-d.
If the vehicle covers 800 miles per week, the amount of depreciation as a standing charge is still £2 10s., but the amount as a running cost is now 800 times 15/16d„ £3 2s. 6d., and the operator's total revenue is £5 12s. 6d. per week. This third method gives better results, On low weekly mileage it is as profitable as the first method, but is better than the second. If the vehicle runs a high weekly mileage, this third method is better than the first but not so good as the second. The conclusion is that the first method should be applied to low mileages, and the second to high mileages. Where the mileages vary, the third method should be used.
So far as most municipal hire is concerned, the first method is the one to be used as the weekly mileages are usually in the region of 200-250. Having settled that point, I can now proceed to deal with costs and charges for municipalities.
I must first address myself to the owner-driver—and may state that the reader who has some owner-driver friends should bring this article to their notice. The chief trouble with the owner-driver is that he regards his wages as profit and, worse still, all the profit he need earn. He is entitled to a net profit over and, above the, cost of operating his vehicle and included in that cost are his wages as driver.
can see no point in giving that profit away. To quote on the basis of wages being a substitute for profit is unfair, as it is taking advantage of the proprietor of a normal business who has to observe the Road Haulage Wages Act, besides finding a wage for himself as manager.
Unfortunately, many municipalities take advantage of the fact that the owner-driver is satisfied to earn a driver's wage and no more. The sensible thing for the ownerdriver to do is to collaborate with his larger competitors, agree on charges and take a chance that work will be available at the appropriate prices.
Dealing with 5-tanner
Now to deal with the question of costs of operation, establishment expenses, profits and charges. I have gone through a series of calculations, taking up-to-date figures, and have set out the results in Table I. I propose to demonstrate the method of arriving at these figures by taking a 5-tonner as an example. It should be noted that following the observations made in the earlier part of this article I have taken depreciation to be a standing charge.
Taking the initial cost of a 5-tonner at £1,000, I deduct first the cost of a set of 34 by 7 tyres, £170, and obtain a figure of £830. For the residual value I shall take an arbitrary sum of £100. This leaves me with £730 as the basic figure on which depreciation must be calculated, Municipal haulage is not particularly strenuous and it will be safe to take five years as the period over which depreciation should be spread. If I divide £730 by five I get £146. I have made another departure from my usual practice in transferring "Maintenance (d)" from the running costs to the standing charges. That is really where it belongs because the item refers to operations such as washing and greasing which are done on a time basis: The standing charges as applied to a 5-boner are as follows: Tax, £35 per annum; wages, Grade I area, £328 (including provision for holidays with pay, National Insurance and insurances under the Workmen's Compensation Act); garage rent, £26; insurance, £60; interest on capital outlay, now calculated at 4 per cent., £40; depreciation, £146; maintenance (d), £42; and establishment charges, £120. This last item may seem to be insufficient. It is less than the figure I usually take for a vehicle of this size, but the difference is justified as there is not much detailed organiza tion necessary when vehicles are engaged on regular contract work.
These figures are set down in the last column of Table I, and the annual total comes to £797. This should next be converted into an hourly charge. In making this calculation I have assumed that the vehicle, whilst it may not he fully employed by the local council. is, nevertheless, in regular use for 50 weeks of 44 hours. That means that £797 must be spread over 2,200 hours, and that gives me 7s. 3d. per hour.
So far as running costs are concerned, it should be appreciated that vehicles engaged on this type of work are heavy on petrol, oil and tyres and cost a little more to maintain than usual.
I have assumed petrol consumption to be a little better than 8 m.p.g. and have taken the price of petrol as the mean between bulk and pump price, that is 3s. 4d. The cost per mile for petrol comes to 4.96d., and lubricants, 0.23d. The tyre life I have taken, 20,000 miles, may be a little optimistic but is borne out by a good many users I have met lately. Taking £170 as the price of a set, the mileage cost per set is 1.9d. I have taken 1.65d. for maintenance
and this brings the total of running costs to 8.74d. I therefore have 7s. 3d. per hour and 8.74d. per mile as my basic costs for time and mileage expenditure.
In assessing profit, regard must be had as to whether the vehicle is on daily or weekly hire. If it be weekly, 15 per cent, profit should be charged, because the operator is fairly sure of regular work. This brings the basic rates to 8s. 4d. per hour and 10d. per mile. If the hire be daily, the minimum profit should be 20 per cent., and this brings the time and mileage charges to 8s, 9d. per hour and 101d. per mile. These figures appear in Table II, which also gives charges for other sizes of vehicles listed in Table I. These time and mileage figures are to be used for calcu lating the rate which the operator should quote. He should not put them forward as they stand, that is to say if he be asked what his charge would be for a 5-tonner on weekly hire, he should not reply Ss. 4d. plus 10d. per mile. These time and mileage charges are only a means to an end. The operator must reckon what his mileage on the contract is likely to be so that he can quote a rate for daily or weekly hire to include his expenditure plus profit. S.T.R.
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