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Used Vehicles gains and losses

9th April 1965, Page 83
9th April 1965
Page 83
Page 84
Page 85
Page 83, 9th April 1965 — Used Vehicles gains and losses
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Which of the following most accurately describes the problem?

AST week comment was made on some of the con

siderations that have to be taken into account when deciding whether to purchase a new or used vehicle for commercial use. Unlike the corresponding situation relevant to the selection of a private car, the personal element in such a choice is of less importance where a commercial vehicle is concerned—though not entirely eliminated—whilst the more mundane matters of operating costs assume a greater importance. However, when making comparisons between new and used vehicles, it is important that these should be valid comparisons.

Because the transport industry exists to provide a service, there can be a greater margin for differing opinions as to the standard of service provided. Indeed, taking the extreme, one school of thought maintains that there should be no occasion for variation in standards of service as it is the function of transport to move goods or passengers from A to B. and until just that is performed it has not fulfilled its function.

But in more practical circles variations in standard of transport service provided are recognized and accepted accordingly. If this contention is allowed then logically it could be claimed that a particular service which requires a new vehicle successfully to do the work cannot also be carried out satisfactorily by an aged vehicle. Either the new vehicle is providing an unnecessarily high standard of service, or vice versa. But between these extremes there is a case for comparing new and used vehicles at least on the basis of a relatively short-term comparison.

Estimates for a Six-tonner

As an example of possible variations in the operating costs of new and used vehicles, the following estimates relevant to a 6-ton lorry fitted with standard platform body and oil engine averaging 600 miles a week are now given.

It will be assumed that the initial price when new is £1,383 and the unladen weight is 2 tons 19 cwt. At the current rate of Excise duty the annual licence would amount to £42. With a slight addition for the annual proportion of the carrier's licence fee, this would amount to the equivalent of 17s, 8d. a week. This calculation is on the basis of a 50-week year to allow for two weeks per annum for major overhaul and driver's holidays.

The cost of driver's wages to the employer for a basic 42-hour week is reckoned to cost £11 18s. 3d, This amount is derived first by taking the statutory minimum remuneration payable to a driver whose home depot is based outside the London area and inclusive of the 6 per cent increase set out in RF181. There is also an allowance for the increased National Health Insurance payments, which came into force on March 29, and an adjustment to provide for holidays with pay.

Rent and rates in respect of garaging the vehicle are arbitrarily assessed at it 2s. a week, whilst comprehensive vehicle insurance incurs an annual premium of £119 Is., or £2 7s. 7d. a week. With interest charged at the current Bank Rate of 7 per cent, a weekly amount of £1 8s. 9d. is added to those standing costs to give a total of £17 14s. 3d. a week for the five items. With the average weekly mileare being 600, the standing cost per mile is 7-08d.

Running Costs

Dealing now with the corresponding five items of running costs, it will be assumed that fuel oil is purchased in bulk at 4s, 7+4, a gallon. Where an average rate of consumption of 16.5 m.p.g. is maintained, a fuel cost of 3.38d, a mile is obtained. Lubricants add 0.28d. and tyres 1.32d. a mile, assuming a tyre mileage life per set of 30,000. Maintenance is reckoned to add 2-52d. a mile, inclusive of washing, servicing and major repairs.

To obtain the balance to be written off as depreciation, the equivalent cost of the original set of tyres is subtracted from the initial cost of the vehicle with a further deduction 549 to allow for the ultimate residual value. With an assumed vehicle mileage life of 150,000, a depreciation cost per mile of 1-72d. is obtained.

The total for the five items of running costs is therefore 922. per mile, or £23 Is. a week. When this is added to the standing cost, the total operating cost becomes 16.30d. a mile, or £40 15s. 3d. a week.

Arbitrary Estimate Earlier the need has been emphasized for any comparisons which may be drawn between the cost of operating new as opposed to used vehicles to be valid. But 'even so, any attempt to estimate an " average " condition of a used vehicle relative to its age in terms of time or mileage must be arbitrary in the extreme. In fact, for all practical purposes, it could well be contended that there could not be an "average " in this sense. Nevertheless, it is necessary to make reasonable proportional adjustment on account of the additional wear and tear which a used vehicle would normally have been subjected to, and then to assess their effect on total operating costs.

In such an exercise the first assumption to be made would be the price likely to be paid for a used vehicle. Excluding the largely nebulous bargains on the one hand, or a bad buy on the other, the overall effect of supply and demand on the used commercial vehicle market results in a buyer getting, in the majority of cases, a vehicle proportional to the price paid. Consequently, at two thirds of the cost of a new vehicle, it will be assumed that a vehicle still has the same proportion of useful life remaining, and similarly with other proportions.

Variations in Operating Costs

First assuming, therefore, that a used 6-ton lorry, for which the cost price new was £1,383, was bought for two thirds of this price, the following variations would result in the 10 items of operating costs.

The annual licence duty would remain the same, as would driver's wages and rent and rates in respect of garaging the vehicle. But because of the lower initial cost price no excess premium based on a ceiling of £1,000 would now apply, so that there would be a slight reduction in the equivalent weekly cost of insurance when new (i2 7s. 7d.) to £2 5s. 9d.

A more substantial reduction occurs in Olt item of interest which is reduced to 19s. 2d. a week, so giving a total for the five items of standing cost, of £17 2s. 10d. as,compared with £17 14s. 3d. when new.

There could, justifiably, be differences of opinion as to possible variations in the cost of fuel and lubricants, but for the purpose of this exercise they will be assumed to be the same as when new—namely, 3.38d. and 0-28d. per mile respectively.

Condition of the Vehicle Bearing in mind that the overall mileage life for this vehicle when purchased new was assumed to be 150,000, it will now be assumed that 50,000 miles has already been run when purchased as a used vehicle. Here again it is. an arbitrary decision to determine just what condition the tyres and vehicle will be in when so purchased as a used vehicle. Because of this two alternative calculations will be made, and in the first instance it will again be assumed that these two items of cost remainthe same.

The final item of operating cost—depreciation--requires special consideration because the variation as between new and used is substantial. It does, however, raise an issue which Might be considered strictly outside consideration of operating costs. This is the standard of service provided. If the comparison is to be a fair one and if, in the first instance, it is accepted that the standard of service to be provided justifies the purchase of a new vehicle, then by the same token it will be illogical to make a comparison with a succession of used vehicles. In other words, whilst it might be accepted that a used vehicle was employed as a short-term measure, the ultimate objective would be to become established with new vehicles.

If this contention is accepted, then in the remaining 100,000 miles of the vehicle's life (that is, 150,000 less the 50,000 miles already Operated by the previous user) the new owner has to build up sufficient funds to buy new at the end of that period. To do this he has therefore to increase the depreciation cost per mile from 1-72d. to 2.59d. The total for the five items of running cost as so stated is therefore 10.09d., with an equivalent weekly cost (at 600 miles a week) of £25 4s. 6d. Added to the standing cost for the used vehicle, this gives a total operating cost of 16-95d. a mile, or £42 7s. 4d. a week, as compared with 16.30d. and £40 15s. 3d. respectively for the new vehicle.

Running Costs With the standing costs remaining the same for this used vehicle with two thirds of its life remaining, the running costs will now be reconsidered. When the vehicle was purchased new a tyre life of 30,000 miles was assumed. It could be contended that some adjustment will be necessary when a vehicle is purchased used and this item of cost is therefore raised to 1-98d. per mile. Similarly, with maintenance costs, although obviously some maintenance must have been done by the previous owner, the second owner would not have the benefit of any reserves built up for the inevitable major repairs. Accordingly an arbitrary increase of 20 per cent will be allowed with a resulting maintenance cost per mile of 3-02d. This gives a total running cost of 11.25d. per mile, or £28 2s. 6d. a week. The resulting total operating cost is then 18-11d. per mile, or £45 5s. 4d. a week. It will be noted that in this second example of a used vehicle when additional allowance is made for the items of tyres and maintenance, the increase in operating costs compared with a similar vehicle when purchased new exceeds 11 per cent.

Applying the same procedure to a vehicle purchased for one third of the initial cost when new, the interest charges are correspondingly reduced to 9s. 7d. a week and the total standing cost to £16 13s. 3d.

Total Costs

On the same basis as before, depreciation will now be increased to 5.18d. per mile, so giving a total running cost of I2-68d. when the four other items remain the same as when new. The total operating cost is then 19.35d. a mile, or £48 7s. 3d. a week.

With the items of tyres and maintenance re-adjusted in proportion to the age of the vehicle, the total running cost per week when the vehicle is purchased with one third of its life remaining then becomes 14.35d. a mile, or £35 17s. 6d. a week. Added to the standing cost, the total operating cost per week then amounts to £52 I ls. Od. It should be reiterated, however, that at this figure the operator would he able to replace his aged vehicle with a new one of similar type after 50,000 miles of operation.

Admittedly there will be many small hauliers operating used vehicles to whom this last assumption would not apply. Seemingly they appear to remain in business on the basis of make do and mend, including a succession of used vehicles.

Outward appearances can be misleading however. But in such circumstances the real cost of " mending " such vehicles is seldom, if ever, fully recorded, since the operator himself does the work.

Even where this does apply and all the additional main tenance work is done at the minimum cost and with the labour involved being largely unpaid, one major disadvan tage still remains. As the used vehicle concerned is increasingly in the garage for repair it is not performing its prime function-earning its keep as a commercial vehicle.

This latter aspect of the respective economics of oper ating used or new is the most important of all. Even if by a combination of favourable circumstances peculiar to a

particular operator of a used vehicle he was able to substantiate similar operating costs as apply to a new vehicle.

he may still be at a disadvantage because of reduced overall revenue resulting from reduced availability,

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