Solving the Problems of the Carrier
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The Incidence of High First Cost
An Approach to, but not a Final Solution of; a Difflcult Problem in which the Factor of High First Cost Plays an Important Part IAM sometimes tempted, as the outcome of special circumstances, to depart from the fundamental principles which I have always urged should underlie the assessment of costs and charges. Whenever do so, I am nearly always sorry for it afterWards
A particular example of the kind of departure I have in mind is in regard to the method of calculating depreciation. All my regular readers are well aware that I positively insist that, for practical purposes, it should be assessed on a mileage basis and not on time: In other words, it should be treated as a running cost and riot a standing charge.
My origind reason for making depreciation a running cost was a.simple one.. Simplicity, by the way, was, in the early days, most essential in anything which had to do with :'osts and charges. The need for it has not yet ceased, by a long way, but is not quite so insistent.as it was then.
'Depreciation, I then decided,was best assessed as a running cost (a) ['manse that was the simplest ,way of r:garding it and (b) because it was the mostpractical method, as hauliers invariably wore their machines out by running them; they did not let them stand idle, and the other factor in depreciation, obsolescence, did not enter into a haulier's calculations.
Assessing Depreciation on a Mileage Basis Quite early in my experience of these matters, I diszovered another and really pressing reason for assessing depreciation on a mileage basis, one which, to my mind, made it almost imperative for a haulier to use that method.
I was making a friendly call on a haulier in the Midlands. He had been an occasional correspondent of mine, but I had never met him. It was summer-time, and one thing which struck me in the course of the preliminary inspection of his premises, vehicles, and so on, was the comparatively large proportion of his small fleet which was idle. I gathered that his business was, to a large extent, a seasonal one: the summer was a slack time with him; he was usually busy in the autumn and winter.
We passed from his works to his office, and so soon as we got there he said he would like a serious talk about his cOsts and charges. He was, he said, making a loss, and could not get more• traffic because he could not get down to the rates his competitors were accepting:
Before proceeding farther with this story, I should emphasize two of this man's characteristics, both of which have since carried him a long way, -so that his business is to-day one of the most successful and consistently profitable of its kind. He was careful in keeping records of all his expenditure and utterly adamant in his attitude towards the then prevalent practice of rate-cutting. He assessed his rates on a cost plus profit basis and, rather than accept traffic at rates which, on the, basis of his costs, seemed
uneconomic, would keep vehicles idle.
Now to get back to the story of what transpired in his office. In telling it I am not, of course, going to give the actual figures, but only some imaginary ones which will serve my present purpose.
He had some eight vehicles, of different sizes and capacities, the original total cost of which was £6,000. In the summer, the average mileage per vehicle was about 300 per week, or 2,400 per week for the fleet. In the autumn and winter, the average per vehicle was SOO miles per week or 6,400 miles per week for the fleet.
He told me that his records, made weekly, showed • substantial losses and he wanted roe to check up and discuss the reason. At first .sight it looked as though I was going to be faced with a difficult task. Actually, I found the solution almost at once.
He was assessing depreciation on a time basis, spreading the amount over four years, so that his total debit per annum on account of that item was £1,500, actually £30 per week tin round figures).
When his vehicles were running only 2,400 miles per week, his depreciation was 3d. per mile, but in the autumn and winter, when they were running 6,400 miles per week, the depreciation was only 1.125d. per mile and as a matter of fact the latter was a fair figure.
He was, therefore, loading his costs with an adverse amount of nearly 2d, per mile, during a period of the year when he needed all the advantage he could obtain, so as to be able to quote competitive rates in order to obtain traffic. He had, in fact, created for himself a sort of vicious circle, by putting up his costs. In this way he diminished his, chances of getting business, thus further reducing the profit-earning mileage of his fleet and, as a result, adding still more to his cost per mile.
The same justification for assessing depreciation on a mileage basis arises in connection with the costing of coaches on private hire,' as I showed in the article dealing with that subject which appeared in "The Commercial Motor" dated October 12 of this year.
Occasions do arise, however, when a departure from this principle seems to be justified, as happened recently in the course of a discussion on the use of hauliers' vehicles. in connection with work under Contract A licences. Thesewas an example of that in my article in "The Commercial Motor" dated October 19. In drawing up the schedules of figures for costs and charges in that article I assessed depreciation on a time basis, giving the vehicles a life of five years. The real reason Was that the operator whom I was helping had some competitive figures in his possession with which he wished to compare his own; it was to meet his wishes in that respect 1 arranged the figures in that way.
When Expensive Bodywork is Used Now for the sequel. A reader of that article, also interested in quoting under a Contract A licence with reference to the operation of some 5-tonners, asked me what modifications he should make to the figures as the use of expensive bodywork would, in his case, increase the amount of the initial outlay involved. Instead of £650 per vehicle, the amount quoted in the article, he would have to pay £800 each for his machines.
I replied that two figures in, the previous schedule would be affected, namely, "interest," which would increase from £26 to £32 per annum, and "Depreciation," which instead of £130 should now be £160.
Then, almost accidentally, I discovered that there was a tremendous difference in the annual mileage to be covered by the vehicles intended for these two contracts. In the one case—that referred to in the article—the annual mileage was expected to be 10,000: in the other it was 50,000.
The vehicles in the second case will not last for half the five years over which the depreciation is spread. If I were undertaking th'e second contract, and usitag the make of chassis specified by the inquirer, I would renew the vehicles annually, in which case, supposing I could get £250 for the old ones when disposing of them, my depreciation would work out at £550 per annum, instead of £160. At the very best, I am sure the operator will have to renew them in alternate years, in which case, assuming £100 to be obtained 'per vehicle on sale, the depreciation will be £350 per annum. Left to my own devices, which would have meant that I should, in both cases, have assessed the depreciation on a
mileage basis, I -should not have been liable to any error. This is the way I should have gone about it.
In the first example, the normal allowance of 'life would have been' 125,000 miles, The vehicle cost was £650; take away the cost of tyres, say £1_10, and it leaves £54C net. Allow £40 as a possible residual value (selling price of a used machine) and we have £500 as the amount to be spread over 125,000 miles. The depreciation allowance is thus 0.96d., and I should have called that Id. per mile.
There is still the factor of obsolescence to be considered. For that I apply a rule-of-thumb formula, which I have found to work out quite well in most cases. The above figure of Id. per mile is the basic amount, but it assumes that the vehicle runs a minimum of 30,000 miles per annum (the figure for annual mileage varies with the quality of the
chassis). • For every 1,000 miles per annum under that minimum of 30,000 there must be added 5 per cent. to the basic figure for depreciation. In this case there are 20,000 miles under the minimum, so that 20 times five, or 100 per cent., must be added to the basic amount, making it 2d. per mile instead of Id. At that rate, the depreciation for a year is £86 6s. 8d., instead of £130 as previously quoted.
In the second case, I would allow no more than 96,000 miles for the vehicle life. The initial price is £800. The tyres will cast the same as in the first case, i.e., £110, leaving £690 net. The residual value will depend, to some extent, upon the care taken of the bodywork. if it be in good condition, the figure might well be £90, leaving a net amount of £600 to be spread over the 96,000 miles. The basic figure for depreciation is thus I id. per mile. No provision whatever need be made for obsolescence, because the vehicle is worn out and discarded in two years. The depreciation for a year is, nevertheless, £312 10s., as compared with the £160 quoted.
The same question figures largely in a problem which I am at present trying to solve. It concerns a hired-vehicle operator who is finding it impossible to make ends meet on the M.O.W.T. rates, according to the revised scale RH/D/35 which came into force, as may be remembered, on January 1, 1944.
He operates 6-tonners, and his vehicles are good-class oil-engined machines, costing, I suppose,. about £900, or even £1,000, as compared with, say, £550 to £600 in respect of petrol-engined machines of not so good a quality.
I have not yet been given all the details and, quite frankly, cannot under
stand why he should be making a loss under that scale. The previous rates, i.e., previous to January' 1, 1944, were insufficient, but I have gathered from most of my friends in a similar situation that, whilst they are not making fortunes out of hiring their vehicles to the Government, they are not starving. Now, the payment which this operator should receive for the hire of his 6-tonners, under the above scale, is £7 Os. 3d. per week, plus 2.69d. per mile. That is on the assumption that the'
vehicles are continuously employed. In addition to the above, the M.O.W.T. pays the Road Fund licence and for the operating permits (A or B licences or Defence Permits). It pays the wages of the driver and statutory attendants, together with their subsistence allowances, statutory additions to wages for Sundays or authorized holidays and overtime, and the cost of other personnel used in connection with the loading or unloading of the vehicles, together with all reasonable garage expenses.
The Ministry pays also for the fuel and for the tyres, the, employer's national insurance contributions and for insurance of vehicles under the tariff form of comprehensive policy. It takes care of the goods-in-transit insurance and pays, at the rate of 40s. per cent, on the wages bill, to cover claims under the Workmen's Compensation Acts.
The established haulier is thus left to make provision for his overheads, garage rent and rates, interest on capital. outlay on vehicles, oil, maintenance and depreciation.
It is obvious that, in a case of this kind, depreciation must be treated as a standing charge and is, as a matter of fact, so treated by the Ministry. Of the running costs, lubricants and maintenance should not amount to more than 1.69d. per mile, leaving Id. per mile for profit.
If the haulier paid £1,000 for the vehicle when new, the amount on which to calculate depreciation, i.e., the full amount less tyres and residual value, can be taken as £750. lithe vehicle be depreciated aver five years that is £150 per annum, or £3 per week. Interest is calculated at 5 per cent. on the falling value of the vehicle and an average figure is, in round figures, £25 per annum, or 10s. per week. Take garage rent at 10s. per week. Overheads, from the very nature of things, are bound to be well below average, probably less than half. Allowing 5s. per week per ton of pay-load, we have-30s. per week for this vehicle. The total of fixed charges is, thus, £5 10s. per week, out of the fixed weekly allowance of £7 Os, 3d., leaving £1 10s. 3d, per week for profit.
An operator with six vehicles each averaging 240 miles per week is thus earning about £9 per week net profit. S.T.R.