How Usage Affects Profits
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The Extent to Which Variation in Average Mileage Can Limit Overall Profitability is Exemplified Here by Comparative Operating Costs of 6and 8-ton Oilers PART from the obvious factor that greater usage of a
vehicle must normally diminish its life in terms of time,
it is apparent from many. readers' inquiries that the effect of variations in overall average mileage on profitability is not understood fully, if at all. Basically there are two main elements in vehicle operation relative to costing, namely, time and mileage. Accordingly, it is convenient to segregate the various items of expenditure involved in running a vehicle into standing and running costs.
As a result, total standing costs are shown as a weekly expenditure, or in addition, when required, as a cost per hour. Running costs, however, being relative to the actual use of the vehicle, are shown in terms of costs per mile, and, in the case of "The Commercial Motor Tables of Operating Costs," as pence per mile, calculated to two places of decimals.
By the addition of standing and running costs, total operating costs are obtained. But it is just at this point of an apparently simple addition that miscalculations can occur, which could have serious repercussions on the profitability of the business as a whole.
THIS is because total operating costs cannot be determined unless a specified mileage—real or estimated—for the appropriate period is accepted. This applies whether or not the operating cost is shown as a total cost for the week (if that is the period under review), or as a total cost per mile. In the first instance the running cost per mile would have to be multiplied by an agreed figure of mileage before the resulting total could be added to the standing costs per week. Alternatively, the total standing cost per week would have to be divided by a:similar figure so as to arrive at a standing Cost per mile before this result could be added to the running cost per mile already calculated.
Variations relative to mileage can also occur in individual items of operating costs. It is recognised that where petrol engined vehicles are involved, an increase in the rate of fuel consumed can occur when only comparatively low mileages are covered. This is on the assumption that such low mileages imply a substantial amount of stop and start work, with a resulting heavier consumption of fuel. This, however, does not normally apply to vehicles fitted with oil engines.
Maintenance is another item of cost which can vary according to the average weekly mileage. This is because the term "maintenance" is used in this context in a comprehensive sense to include not only repairs but servicing and washing. In spite of variations in weekly mileages, it is common practice for n38 many operators to arrange for the washing of vehicles, and possibly some of the lighter servicing tasks, to be carried out on a time basis, possibly weekly or fortnightly. As a result, the proportion of the cost of carrying out this part of general maintenance, in terms of pence per mile, increases as the mileage decreases.
Depreciation is an item of operating costs on which there is probably more difference of opinion as to how it should be calculated than any other of the remaining nine items, namely: licensing, wages, rent and rates, insurance, interest, fuel, lubricants, tyres and maintenance. For the purpose of this series of articles and the compilation of "The Commercial Motor Tables of Operating Costs" the principle of calculating depreciation on a mileage basis is adopted. It is recognized, however, that some operators prefer to make this calculation over a period of years. In the result, however, the apportionment of costs is similar provided normal mileages are involved.
WHATEVER method is adopted, it is a prerequisitethat an YV evaluation of the probable mechanical life of the vehicle concerned is made. This, of course, is the normal criterion on which depreciation is calculated, but there are also other factors to be considered. Thus, the economy to be achieved by fleet standardization following amalgamation or regrouping of companies might justify replacement before the normal life of a vehicle had run its full course.
Obsolescence is another factor which has to be considered relevant to depreciation. Where traffic requirements arc such that the appearance of a vehicle, as distinct from its cornparative efficiency, is of substantial importance, it may be necessary to have to replace the vehicle sooner than otherwise would have been the case. Examples of this type of operation could occur in retail delivery or private hire or tours in the passenger field.
It will therefore be realized that an adverse combination of all these variable factors relative to low mileage could have a substantial effect, in total, on the profitability of the vehicle concerned. Whilst it is appreciated that in many instances. and particularly where new work is being undertaken, it may be difficult to estimate what the average mileage is likely, to be, nevertheless some estimate must be made if a realistic. operating cost is to be formulated. As examples of the incidence of mileage on costs I will now detail the expenditure involved in running a six ton rigid oiler or alternatively, an eight ton " artic," also with oil engine, where the average weekly mileagz is either 400 or 600.
Fr HE unladen weight of the six-tonner will be reckoned about
2 tons 19 cwt. with a resulting annual licence duty of £35, the equivalent of 1$.s. a week. This is based on a 50-week year to allow for two weeks when the vehicle may be off the road for either drivers' holidays or major overhaul. In accordance with the new Road Haulage Wages Regulations RH. (70), the total cost of wages to the employer, assuming a 44-hour week, for a driver of this size of vehicle operating
in Grade I areas, would be £10 9s, Od. This includes allowances for National Health and employers' liability insurance contributions, and an appropriate allowance for holidays with pay.
Rent and rates in respect of garaging the vehicle will be estimated to cost 1 Is. 3d. a week. Allowing for the increases in commercial motor vehicle insurance premiums announced as from JanuarY 1 this year, the amount payable in respect of this vehicle, assuming it wai located in a medium risk area, is reckoned at £45 12s. a year or 18s. 2d. a week.
. This is the equivalent cost of either a comprehensive policy for ancillary operation or the provision of third party cover for professional, hauliers.
With an initial outlay of £1,325, interest charged at a nominal rate of 3 per cent. would add 15s. 10d., giving.a total for the five item s of standing costs of £13 8s. 3d. a week. Where the average Weekly mileage was 600 the corresponding standing cost. per mile would be 5.36d., increasing to 8.05d. at 400 miles per week.
THE largest of the five items of running costs is fuel. Assuming this is purchased in bulk at 3s. 101-cl. per gallon and the rate of consumption averages 16.5 m.p.g., fuel cost per mile would amount to 2,83d. Lubricants are reckoned at 0,25d. and tyres at 1.35d. a mile. This tatter calculation is based on a cost per set of £169 and a mileage life of 30,000. Where the weekly mileage is 600, maintenance is calculated to cost 2.18d. per mile. At 400 miles a week, the cost is 2.30d.
In order to calculate depreciation it is first necessary to determine the amount to be written off. This is obtained by deducting the cost of the original set of tyres from the initial price of the vehicle, with a further deduction appropriate to the estimated residual value. Assuming a vehicle life of 150,000 miles, the depreciation cost per mile would he 1.62d. The total running cost per mile is therefore 8.23d. at 600 miles a week and 8.35d, at 400 miles a week. The corresponding total running cost each week would be £20 1 Is. 6d. and £13 18s. 4d. respectively.
rr HE addition of these totals to the standing cost then gives 1an operating cost per mile of 13.59d. at 600 miles a week and 16.40d. at 400 miles a week. The total operating cost each week is correspondingly £33 19s. 9d. and £27 6s. 7d. respectively. Finally, allowing for a 20 per cent. increase for overhead costs and a further 20 per cent, for profit margin, the minimum recommended charge per mile to the customer would be I9.03d. at 600 miles a week and 22.96d. at 400 miles a week, whilst the total charge for the week would be £47 1 ls. 7d. or £38 5s. 4d. respectively.
It should be noted that if a quotation to a customer for a job involving a mileage of 400 were made on the assumption that the total weekly mileage throughout the year would be 600, then the total amount for the job would be 400 x 19.03d., i.e., £31 14s. 4d. If, in fact, it subsequently transpires that the average mileage throughout the year is only the equivalent of 400 a week. then the £31 14s. .4d. received in respect of this particular job would represent an inadequate return for what would then amount to a week's work.
` As already shown, the total operating cost a week alone, irrespective of overhead .costs or profit margin, would be £27 6s. 7d. at 400 miles a week. Allowing for a 20 per cent, increase on this amount for overhead costs would give a total of £32 15s. I Id. Consequently, if only £31 14s. 44. were received from the customer then not only would there be no profit margin but, instead. there would be a loss of LI ls. 7d. on the week's working.
Assuming that the unladen weight of the 8-ton "attic." complete, is 3 tons 17 cwt., then the annual licence duty would be £50. the equivalent of £1 per week. Wages, being in the same category, namely 5-10 tons, would remain the same at 110 9s. Od. whilst rent and rates would again be reckoned at .11s.. 3d. a week.
With appropriate allowances for the recent increases in insurance premiums, this item of standing costs will be assessed at £1 3s. 10d., whilst interest on the initial outlay of £1.890 would add El 2s. 8d. The total for these five items of standing cost is therefore £14 6s. 9d., giving a standing cost per mile of 5.73d. at 600 miles a week and 8.60d. at 400 miles a week.
With fuel purchased in bulk, as before, at 3s. 10.4d. a gallon, but with a rate of consumption of 13 m.p.g. the fuel cost per mile now amounts to 3.60d. Lubricants are reckoned at 0.26d. and tyres at 1.80d., assuming that a set now costs £225.
Maintenance is assessed a little higher at 2.38d. per mtl when the weekly mileage is 600, or 2.64d. at 400 miles a week. Calculated as before, but on the higher initial outlay of £1.890. the depreciation cost per mile becomes.' 2.03d, after appropriate allowances for residual value has been made for both tractor unit and trailer.
A T 600 miles a week the total running cost for an 8-ton " artic is therefore 10.70d. per mite, or 125 3s. 6d. a week. At 400 miles each week the corresponding figures arc 10.33d. per mile, and £17 4s. 4d. a week.
Total operating cost per mile is 15.80d. or 18.93d. per mile at the lower weekly mileage, The total operating cost each week would be £39 10s. 3d. at 600 miles a week, or £31 us. Id. at 400 miles a week. Allowing for two additions of 20 per cent, as before for overhead costs and profit margin, the minimum recommended charge to a customer would be 22.12(1. per mile or £55 6s. 4d. a week at 600 miles a week and 26.50d. per mile or £44 3s. 5d. a week when the weekly rnileag.: averaged 400.
Making the same comparison as before, if work involving 400 miles were charged to a customer at the rate applicable to the higher weekly mileage, namely, 22.12d. per mile, this would amount to 136 7s. 44. This is again less than the actual cost to the operator, inclusive of overhead costs, when th,.. vehicle only averages 400, namely £37 I7s. 3d.
In the calculation of running costs no variation was made in the cost of depreciation when the lower mileage applied. despite the earlier remarks regarding obsolescence. This is because in these two instances it is assumed that both the 6-ton oiler and 8-ton "artie" will be engaged on medium distance work which would not normally be so highly competitive, relative to appearance of vehicles, as when engaged in retail delivery.