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When OBSOLESCENCE Creeps In

24th January 1958
Page 60
Page 63
Page 60, 24th January 1958 — When OBSOLESCENCE Creeps In
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Which of the following most accurately describes the problem?

Four Methods of Cakulating Depreciation Compared: Theory Must Be Blended with Practical Experience

T AST week I stressed the importance of depreciation as one

of the 10 items of operating costs of commercial vehicles and suggested that its exclusion was often the cause of newcomers unwittingly quoting cut rates. The principles underlying the alternative methods based on mileage and time were examined, and I drew attention to the influence of obsolescence. This item, I explained, came about as a result of operating conditions whereby the vehicle concerned became out-of-date for the purpose for which it was first intended before it had reached the stage when it was uneconomic to run on account of excessive maintenance costs.

Because it is considered that obsolescence applies to only a small percentage of commercial vehicles, the mileage method of calculating depreciation is adopted for "'The Commercial Motor' Tables of Operating Costs." Even here, however, for the lower weekly mileages a compromise is adopted so as to introduce some element of obsolescence.

This week I will examine details of depreciation costs based on either time or mileage, or a combination of both, and for this exercise, a popular petrol-engined 5-tonner has been chosen as an example, the cost price of which is £1,150. Assuming that the cost d'f the initial set of tyres and the residual value of the vehicle when finally sold, together amount to £250, a balance of £900 remains for depreciation. Assessing a mileage life for this class of vehicle at 125,000, the depreciation cost per mile, ignoring any other factors, would be 1.73d.

I pointed out last week that a commercial vehicle is normally acquired as a business proposition to be used to the maximum extent. Nevertheless, there are operating conditions where the suggested maximum economic mileage life of 125.000 would not be accomplished within the period which an operator normally renews his fleet-say, five years for this particular class of vehicle. Under these conditions there would be three courses open to the operator. He could renew (1) at 125,000 miles, regardless of what period that might cover, (2) every five years. regardless of the mileage operated, or (3) on the basis of some form of compromise.

In the accompanying table figures relative to these three methods are set out. Under the heading, " Mileage," week4 totals are shown ranging from 200 to 1,000 miles, with the corresponding total for a 50-week year and for a five-yea; period. Under the heading, Method," column A shows the cost per mile for depreciation based on a mileage life of 125,000, regardless of the period that such a total may take to accumulate. The figure is the same throughout the range a eight different weekly mileages.

Critical Mileage In column B, depreciation has been calculated solely on the basis of time-a five-year life. As a result, the cost per mile shows considerable variation. When operating 200 miles per week the cost is 4.32d. per mile. This sum decreases relative to the increase in weekly mileage until at 500 miles per week the cost is the same as when calculated on mileage.

This is because the total of 500 miles per week in this particular example happens to be the critical figure. Based on a 50-week year, this is equivalent to 25,000 miles per year, or 125,000 miles for the five-year period. Thus, the agreed life factors of 125,000 miles and five years coincide. As the weekly mileage continues to increase, depreciation cost per mile diminishes, being only 0.86d. at 1,000 miles per week.

Column C combines columns A and B, in that half the depreciation cost is based on mileage and half on time. Examination of these figures shows that, whilst the cost per mile continues to decrease as the weekly mileage increases, the rate of decrease is less steep than in column B. The cost per mile at 200 miles per week is now 3.03d., -dropping to 1.30d. at 1,000 miles per week. Once again the cost is 1.73d. at 500 miles per week. Before proceeding to explain column D-the method used in calculating the depreciation 1 " The Commercial Motor' Tables of Operating Costs," the tactical aspect of the methods adopted in columns A, B and need to be considered.

The first line in column A shows the depreciation cost per tile as I.73d., although the mileage covered in five years is the omparatively small total, for a commercial vehicle, of 50,000. 'herefore. to achieve the mileage life of the 125,000 agreed Ader this system would require a period of 12+ years, It may be that under certain, though limited, conditions of peration, this may be a practical possibility. The small haulier erving agricultural communities with possible weekly visits to ocal markets, might still be able to maintain the standard of ervice required despite the age of the vehicle. Provided their urchases were delivered in reasonable time, his customers light well be satisfied.

Many ancillary operators, too, sometimes with large fleets, ontinue to run vehicles of venerable age to fetch and carry or larger vehicles. But these examples, and possibly others, re very much the exception.

Whether professional hauliers or C-licensees, many .perators would find that, with an annual mileage as low as 0,000, Competition would not permit the operation of a vehicle or 121 years, no matter how well it was maintained. Short of • complete. replacement of the body, which would almost ertainly be totally uneconomic, it would inevitably appear out date alongside newer vehicles and thereby reflect unfavourIlly on its operator. Even if such a body rebuild were conemplated, changes and improvements in chassis design during period of 12+ years would still weigh heavily in favour of the :ewer vehicle.

Highest Mileages

After, however, the critical figure of 500 miles per week (or .5,000 miles per year) has been reached, there are no correponding problems to be considered when the highest mileages re reached. At 1,000 miles per week, for example, 250,000 Mies would be operated in five years, but throughout that teriod, depreciation at the rate of 1.73d. per mile has been .ctumulated. funds would have been available at the halfway tage-125,000 miles—with which to obtain a replacement Thiele.

As regards the lower weekly mileages it cannot be overnnphasized that, however excellent and necessary it is to :onsider the principles underlying operating costs, that :onsideration must be blended with practical experience.

In contrast to column A, there may well be conditions at mth ends of the scale where a system of depreciation 'based entirely on time, as shown in column B, could be applied. For luxury traffic—for example, coach tours and some private hire—the high rate of 4.32d, per mile depreciation cost might be absorbed. But in the more normal use of commercial vehicles, this item might well be found excessive in the light of modern competitive conditions.

At the other end of the range, a figure of 0.86d. per mile, when 1,000 miles per week is operated, would be completely unrealistic. This is because, if it is agreed that 125,000 miles is the economic limit for a popular 5-tanner, no arbitrary decision on outcome of a particular costing policy can double overnight the inherent mileage life of a vehicle:

Better Balance A better balance is undoubtedly obtained by combining the two factors of time and mileage, as shown in column C, and under some conditions Of operation—for example, when quoting for contract work—the additional clerical work involved may be considered worth while. Even so, to a lesser degree it still embodies the inherent defect, emphasized when dealing with column B, that, when high weekly mileages are operated, it is assumed that the total vehicle life in terms of miles can therefore be extended. There can be no sound reason for making any such assumption.

Finally, coming to column D, once again the cost per mile is given as 1.73d, for the critical mileage of 500 per week, and remains at that figure for any increase in the weekly mileage above 500. In that respect the results obtained from column D are the same as in column A for depreciation calculated directly on mileage.

That, in fact, is the principle employed in column 0, with the proviso that an adjustment is made as some, but not complete, compensation for obsolescence. The method employed is to add to the basic cost per mile of 10 per cent, for each 100 miles less than the critical weekly. mileage figure of 500. Thus for 400 miles, 0.17d. is added to the basic figure of I.73d., giving a total of 1.90d. Similarly, 20 per cent. is added with a mileage of 300 per week and 30 per cent. at 200 miles per week.

The figure of 10 per cent, is admittedly an arbitrary one and is not even directly applicable to all figures shown in the "Tables of Operating Costs." It is, nevertheless, based on many years' experience in averaging commercial-vehicle costs and provides an equitable compromise between time and mileage in the lower. mileage groups, whilst remaining realistic when higher weekly mileages are operated. Moreover, it is comparatively simple to calculate always an important factor of commercial-vehicle costing.—S.B.

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