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Price of under employment

7th September 1962
Page 91
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Page 91, 7th September 1962 — Price of under employment
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Which of the following most accurately describes the problem?

Ignorance of the variation in cost per mile is the cause of much unprofitable operation of small vans

REQUESTS to this office for advice on operating costs are often made simply in the form "How much does it cost to run a 2-tonner? " But before the request can be answered, some indication of the average yearly mileage must be obtained, even if several other assumptions such as the normality of operation are valid. Yet when asked for an approximate assessment of the likely mileage the inquirer, more often than not, will insist that this is not known as no vehicle has yet, in fact, been operated.

Such a situation is understandable and common enough, particularly where a trader is contemplating acquiring his own goods vehicle for the first time. But, if persisted in. this attitude could have ominous repercussions. Whilst admittedly factual information as to the average weekly mileage could not be available at this stage, nevertheless it would seem that inadequate consideration has been given as to whether a vehicle is realty necessary if a realistic estimate has not already been made as to the work it will perform and mileage it can be expected to run.

More fundamental still is the need for the prospective operator to appreciate from the outset the effect of the division of operating costs into running costs and standing costs, and their respective relation to average mileages. Particularly where small delivery vans are concerned, the emphasis as to their main function is understandably on service, by providing the trader with the opportunity to ensure prompt and regular deliveries to his customers. But if no regard is paid to the important factor of average mileage, a service van can ,prove to be an expensive luxury. The sum total of the intermittent periods when the van is not in use can prove too heavy a liability when the ultimate apportionment of operating costs has to be made.

Except for a few luxury trades dealing exclusively with high priced products, it will inevitably prove uneconomic to contemplate acquiring and operating a goods vehicle purely to perform spasmodic trips with no set plans as to scheduled deliveries. If such an attempt were made the mileage may well prove to be so low and the operating costs so high that the alternative of hiring vehicles for the few journeys required would have proved a more economical proposition.

With smaller types of goods vehicles there is an unfortunate tendency for some users to take the view that because of their limited size the need for planned operation (which they would readily admit was necessary for larger vehicles) was superfluous. Users of small vans might also contend, with apparent justification, that because the mileage will inevitably be low variation in such mileage must therefore be relatively unimportant.

Proof of just how erroneous such contentions can be is shown in the current edition of The Commercial Motor Tables of Operating Costs. If the all-important qualification of average weekly mileage is ignored, the following apparently irreconcilable comparisons of operating costs per mile could be obtained: 10-tonner, 18.08d.; 7-tonner, 19.26d. and 4-tonner, 25.04d. But such figures are quite misleading unless related to the average weekly mileage, which in these three examples happens to be 800, 400 and 200 respectively.

The underlying reason for this wide variation is that the standing costs, as their name implies, remain static whatever the mileage run. In contrast, the running cost increases directly in relation to the mileage except for minor variations.

The following details of operating costs for a 2-ton van fitted with petrol engine and averaging alternately 300 and 400 miles a week, arc given to illustrate how these variations arise. ,

It will be assumed the unladen weight is 2 ton 2 cwt., with a resulting annual licence duty of £33, This gives an equivalent standing cost per week of 13s. 3d. on the basis of a 50-week year to allow for two weeks per annum when the vehicle may be off the road for major overhaul or driver's holidays.

When an adult driver is employed, the total cost of wages to the employer is reckoned as £10 Os. 6d. per week_ This amount includes additions for National Insurance and employers' voluntary liability insurance contributions, as well as an adjustment to permit two weeks' annual holiday with pay.

The conditions under which ancillary vehicles may be housed can vary substantially and rent and rates in respect of garaging this van will be nominally assessed at the equivalent of us. 2d.

per week. For the purpose of vehicle insurance it will be assumed that the van is based in a medium risk area and that the rate is applicable to C licence operation. The resulting annual premium of £27 gives an equivalent standing cost per week of 10s. 10d.

An average price derived from a sample selection of 2-tonners with van bodies amounts to £921. Allowing for a nominal rate of five per cent., an interest charge per week of 18s. 5d is obtained. The total for these five items of standing costs thus amounts to £12 14s. 2d. a week.

Expressed as a weekly or yearly total, the amount of standing costsremains the same• regardless of the extent to which the van may be employed. But for the same reason, the standing cost per mile can vary substantially and with it the profitability of operation.

In this instance, a comparatively .low average weekly mileage would be usual for a 2-ton van, say either 300 or 400 miles per week. Despite this relatively small addition of 100 miles per week, the difference in the standing cost per mile is appreciable. At 300 miles per week it amounts to 10.17d. and is reduced to 7.63d. at 400 miles per week.

Dealing now with running costs, it will be assumed that petrol is purchased in bulk at 4s. Id. per gallon and this petrolengined 2-ton van has a rate of fuel consumption of 16 m.p.g. under normal conditions. But at the lower average mileage of 300 per week, an appropriate addition will be made to allow for an excess of stop and start work which this low mileage implies. The resulting fuel cost per mile is then 3.37d. Lubricants are reckoned as 0.23d. per mile.

The cost of a set of tyres for this vehicle is assessed at £85 and, with an estimated mileage life of .30,000, the resulting tyre cost per mile becomes 0.68d. Maintenance, including washing, servicing and subsequent major repairs, is estimated at 2.34d.

Depreciation is calculated to cost I.96d. per mile. The balance to be written off is obtained by first deducting the equivalent cost of the original set of tyres from the initial price of the vehicle, followed by a further deduction appropriate to the estimated residual value. The amount so derived is £744 and, with an estimated vehicle life of 100,000 miles, a depreciation cost per mile of 1.78d. is obtained. But because the effect of obsolescence becomes higher with relatively low average weekly mileages, an appropriate addition will be made to give the stated depreciation cost per mile of 1.96d.

The total of these five items of running costs thus amounts to 8.58d. per mile or £10 14s. 6d. per week when averaging 300 miles per week. The addition of standing and running costs gives a corresponding operating cost of 18.75d. per mile or 1:23 8s. 8d. per week. Should this van average 400 miles per week, the following adjustments would have to be made to these estimates. Whilst the amount of standing costs per week remains the same, as already stated, the standing cdst per mile at 400 miles per week will be reduced to 7.63d. Also at this higher average weekly mileage, the basic fuel cost per mile of 3.06d. could he accepted without any addition for stop and start work. The two items of lubricants and tyres, however, remain the same.

The estimated cost of maintenance will be reduced from 2.34d. to 1.85d. at 400 miles per week. The reason for this is that, as already mentioned, this item of cost includes washing of the van in addition to repairs. Because washing of delivery vans is most commonly undertaken on a time basis, say weekly, the proportion of the cost of this task becomes lower per mile as the weekly mileage increases. Also, because of. the higher mileage, no allowance will now be made in respect of obsolescence in the cost of depreciation, which is thereby reduced to 1.78d. Incidentally, at 400 miles per week an estimated vehicle life of 100,000 miles would imply a five-year replacement policy.

The total of these five items of running costs is .therefore 7.60d. per mile or £12 13s, 4d. per week. Added to the standing costs, the total operating cost, when averaging 400 miles per week, would be I5.23d. per mile, or £25 7s. 6d. per week.

Comparing these two results for. alternatively 300 or 400 mites Per week, it will be noted that the total additional cost of the extra 100 miles of operation is £1 18s. 10d., or a notional cost per mile of 4.66d. This latter figure compares with the total operation costs per mile of 18.75d. at 300 miles per week, or 15.23d. at 400 miles per week. This comparison strikingly emphasizes how important it is that every endeavour should be made to ensure full employment for commercial vehicles. Moreover, this requirement is in no way , diminished because the Vehicle concerned happens to be a Small van.

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