Problems of the
Page 60
Page 61
If you've noticed an error in this article please click here to report it so we can fix it.
HAULIER and CARRIER ITERMINATED the previous article at a point in a conversation with a haulier, a newcomer to the industry, at which, in discussing the figures in The Commercial Motor Tables of Operating Costs as applied to his second-hand lorry, he had put forward the view that, by buying a second-hand vehicle, he had escaped some of the effects of depreciation. He had the idea that a new vehicle depreciates rapidly at first and not so quickly afterwards. He concluded, therefore, that by buying a second-hand machine, instead of a new one, his allowance for depreciation should be less than that given in the Tables.
Now I have dealt with this problem before and, as a rule, have preferred to take the simple line that, as in commercial-vehicle practice depreciation is measured according to the life in miles, it persists at the same amount per mile throughout the life of the vehicle.
An Example of Depreciation.
To take a simple illustration, assume the case of a vehicle costing, without tyres, £200 when new, and depreciating at approximately id. per mile. That is allowing a life of about 100,000 miles, which is approximately correct for the less expensive types of commercial vehicle.
Now, if someone buys this machine at the end of a couple of years' use, when it has covered 50,000 miles, and he pays £100 for it, he is purchasing, for his 1100, a vehicle which still has 50,000 miles of life : the depreciation is, therefore, still at the rate of id. per mile.
The force of the foregoing argument is affected according to whether or not the buyer secures what is called a "bargain." If, for example, the particular machine that I have cited as an example has covered only 25,000 miles in the two years, instead of, as was -assumed, 50,000,, then it still has a life of 75,0(X) miles and the depreciation is calculated by dividing £100 by 75,000—approximately id. per mile.
B46
I always envisage the item of depreciation in the Tables, however, as a contribution to a sinking fund, to be set apart for the purchase of a new vehicle when that becomes necessary. If it be viewed in that light, it will be realized that, in the case of a second-hand vehicle, the amount to be set aside is increased, and this is the point of view that I proceeded to put before my caller.
I left off, in the preceding article, at the point where I had told him that buying " second-hand " increased the item of depreciation, and he had expressed considerable surprise and wanted to know how I made that out.
A Problem of Depreciation Solved.
"Well, look at it this way," I said. "The amount set down for depreciation is the sum you should put aside towards a new vehicle. Now you paid, for your second-hand vehicle, about half the cost of a new one. If I take it that you just got value for money, then it must depreciate at the same rate per mile as a new one. If you've a bargain, it'll depreciate a bit less than the average. If you have not a bargain, it will wear out rather more rapidly and cost you a little more per mile for depreciation. For the sake of argument, FIl take it that you paid just the right price.
"By the time your vehicle's done, if you set aside the amount for depreciation, as I recommend you to do, as a sinking fund for a new vehicle, you will have about half the amount necessary to buy a new lorry. You w11, therefore, have two courses open to you : either you buy another second-hand one, or you buy a new vehicle on the instalment system.
"If you want to be able to buy a new machine out of these savings you'll have to put aside twice as much, on account of depreciation, as is suggested in the Tahle and that is what I mean when I say that, to some extent, buying a second-hand machine increases the Item of depreciation. But you needn't let it trouble yon. The best thing to do is to leave depreciation as it is and make such provision as you deem advisable for the purchaSe of new vehicles as and when you need them. If you begin to manipulate the Tables you will upset your fair schedule of operating costs."
"Well, I think that'll do for depreciation," he said.
"That has, apart from lubricating oil, which is a small item, completed the total of your running costs."
I proceeded to set them down on paper, having in mind my visitor's difficulty with what a famous English statesman once described as "those — dots." The schedule was: petrol 1.00d., oil 0.05d., tyres 0.45d., maintenance 0.50d., depreciation 0.50d., total 2.50d.
"Is there anything about the standing charges that you don't understand?"
"No, I don't think so," he answered. "I don't pay quite so much for garage rent as is set down in the Tables and I'm not quite sure that I understand the meaning of the item of interest."
"I'll go through them quickly for you. What's the annual tax on your vehicle? "
" Twenty-eight pounds."
"That is about 11s. 2d. per week. Insurance . . . ." "Oh, that's another thing. [take out the policy to cover only third-party risks, fire and burglary," he in
terrupted, "and I find £12 a year on that account."
"That's not al good idea, you know," I said, "but we won't go into it now. What is your garage rent?"
"Five shillings a week."
"About the same as you pay for insurance, calculating the amount weekly? That leaves only interest, which is the money that your capital would have earned for you if you'd invested it in safe securities and not bought a lorry with it. The calculation of its exact amount is rather an intricate one and I won't trouble you with it, except to tell you that, at the present time, you can take it at the rate of 2 per cent. per annum on your £110, which is £2 4s. per annum, say Is. per week."
"I was going to ask you," he said, "why I should include that as an operation expense, but if it's only is. a week, I don't think I'll trouble you."
I then set out for him the schedule of standing charges, including, as he agreed, £3 per week as a fair wagei to himself as driver. The items were : licence 11s. 2d., wages £3, garage rent 5s., insurance 5s., in terest is.; total £4 2s. 2d. .
"Now," I said, we have a sound basis of figures from which we canTalculate. your actual cost per mile run. You say you are doing 300 miles per week?"
"Yes, that is all I am able to-get work for, just now." "Then, to find the cost per niile, you hive to spread the total of standing charges, namely,14 2s. 2d. a week, • over 300 miles." • Iworked out a little sum for him, arriving at a figure of 3.28d. per mile, which I told him was just over aid.
"You must add that to the total running costs (2.50d. per mile) to arrive at the total cost per mile. Actually, the amount is 5.78d., which is a little over Md. So you see that 6d. per mile is really insufficient to bring you in a fair profit. You are earning only just about es. per week gross profit."
"Why do you say gross profit?"
"Because, out of that sum, you have to find money to pay sundry expenses, which are not included in the operating costs of the vehicle itself.
"I can't give you a schedule off-hand, but I can just put a point before you which will make it clear to you that there are such expenses. How do you know you are covering 300 miles a week?"
"That's the speedometer reading."
"And is that all mileage for which you are paid? Don't you have to run from your garage to your customers, and are you always paid for that?"