Cost comparison is an aid to decision making
Page 41
Page 42
If you've noticed an error in this article please click here to report it so we can fix it.
by Johnny Johnson
TO DISCUSS the comparative courses of action when an operator is offered rather more traffic than the capacity of his fleet will cope with might be considered to be inopportune at the present time. The order of the day is more likely to include falling traffic.
However, there are those operators still who find themselves in this position and every operator will, sooner or later, have to make a decision about whether to buy another vehicle of similar size to an existing unit or to sell the one he owns and buy a larger type.
It might be as well, therefore, to to consider the cost implications and the effect on the breakeven point of adopting either course before taking a decision.
Take the hypothetical case of an operator running a rigid boxvan of 16 tons gross vehicle weight who is offered a quantity of traffic equal to that Which be is already carrying in the vehicle. He is faced with the dilemma, assuming that he is convinced of the continuity of the traffic, whether to buy another similar vehicle or sell the existing unit and buy a 32-ton gross vehicle.
Suppose he feels that an appropriate larger vehicle would be a 32-1on antic unit with boxbody trailer.
Using the figures contained in the latest edition of Corntriercica Motor Tab/es of Operating Costs, it is possible to obtain a comparison of the financial implications of adopting either option.
The annual cost and revenue of these two vehicles is calculated using Table 3. This charge is [obtained by dividing the standing cost by the weekly mileage and adding the running cost. To this figure must be added 20 per cent for overhead charges and 'another 20 per cent for profit and contingency. The cost for 2 vehicles is £14,113.
This gives a minimum Charge per mile of 47.32p which, multiplied by the annual mileage of 21,000, results in an annual revenue of £19,874 for 2 vehicles.
The surplus of revenue over costs can therefore be calculated as £5,761.
Repeating the exercise for the 324on artic van trailer unit, the figures for which are reproduced in the second column of the table, the annual cost appears as : standing cost (£138.71 multiplied by 52) £7,212 plus running cost (24.53p multiplied by 21,000) £6,145, together a total annual cost of £13,357.
The revenue to be gained can be shown as a minimum charge of 82.89p a mile for 21,000 miles giving £17,407.
In this case the surplus of revenue over cost is somewhat lower at £4,050.
Smaller units
From these figures it can be seen that though the cost of running the two smaller units might well be in the region of £750 a year more than that which would be incurred by operating only the larger single unit, the extra revenue to be gained amounts to nearly £2,500.
At the end of the year, therefore, the operation of the two 16-ton units will result in something like £1,700 more profit than if the 32-ton artic unit were preferred. Of course, it cannot be claimed that u these figures will produc precise cost picture for opE ing costs are peculiar to individual operator and ti figures contained in CM Ta• are but averages.
Nevertheless, an open following the guideline down but using his own i figures where this is poss should be able more pre& to establish a basis for c parison so that he is able reach a sensible decision.
First it is necessary to m a straightforward carnpari between the operation of 16-ton •gross rigid units one 32-ton antic unit w. ignoring, for the moment, financial implications of and repurchase and the cosi servicing the capital necess to do this.
From the extract from CM Tables reproduced, it 4 be seen that the standing c per week of one four-wheE is £83.01 so that the ann standing cost will be this s multiplied by 52 giving £4,3 Therefore the total stand cost for both vehicles will twice that sum or £8,632. e running cost for one of vehicles operating, say, 10 miles a year equals 5p x 21,000) £2,740.50 or, xi4th vehicles £5,481.
ie total annual cost for sting the two vehicles will .herefore, £14,113.
obtain the annual nue it is necessary to a some provision for overS which are not included :he cost factors in CM .es and add this to the as well as to make provifor a profit. Comparing relative breakeven points, e is really no significant ,rence to influence the sion.
• .breakeven point is, of se, that point in the year's ation at which the annual s of operating the vehicle been recovered and from point it is not possible for operator to incur a loss. iously, the sooner this Lt has been reached in the ncial year the better for verator's peace of mind. he breakeven charts reproed here show the comparibetween the two different ions.
; will be seen that operatthe two smaller vehicles a breakeven point of )..00 miles and £12,400 anue received. For the ;er single vehicle the same at is reached at 13,400 es and £11,200.
'he difference in mileage at is negligible and the single t has the advantage in a enue target earned of some 200.
tic advantage
t has to be realised that the ic unit has the advantage t it can be used with ither trailer in a pure artiated vehicle situation in ich the tractive unit is en;ed in hauling one trailer ile another is left for load; or unloading. That situan is not quite so advantanis to the articulated unit might first appear.
:n these days when the iwbar outfit no longer needs attendant—and has not le so for the past five years he rigid vehicle has someng of the same advantage.
:n buying a new vehicle of this type, the possibility of drawbar operation later might be borne in mind. It might be prudent, therefore, to buy a machine with engine and braking capacity suitable for drawbar purposes.
CM Cost Tables show the additional cost of adding a drawbar trailer to the rigid four-wheeler as £19.56 a week standing costs and 4.07p a mile running costs.
These are made up of licence fee £1.60, rent and rates £2.67, insurance £4.79 and interest on capital employed £10.32. It has been assumed that no additional payment will accrue to the driver in the shape of extra wages.
Doubted capacity
The extra running costs shown are fuel nil, lubricants 0.04p, tyres 1.98p, maintenance 1.01p, and depreciation 1.04p. Inquiries from operators of these units has shown that little or no extra fuel cost is incurred in their operation.
Therefore, on the original criterion of 21,000 miles a year, the additional annual 1 cost will be £19.56 x 52 or £1,017.12 standing cost plus 4.07p x 21,000 equals £854.70, a total of £1,871.82.
So for less than £2,000 a year the carrying caparity of the 16-40n-gross rigid can be doubled and either the revenue doubled with the carrying capacity or the operator provided with a comfortable margin for rates negotiation.
On the strength of the figures used and calculated, it would appear that the reten tion of the existing unit and purchase of a similar vehicle is much more attractive than the alternative choice.
However, as has already been pointed out, an operator's own figures will either confirm this impression or confound the conclusion altogether. Only by doing the sums and making a proper cost comparison and then evaluating that in relation to all the operating implications can an operator form a sensible conclusion.