Allowing for Loss of Traffic If a Schedule of Charges
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be Assessed on a Basis of Full Employment for a Vehide, Occasional Idle Time Can Lose the Operator Money Although No Running THIS:article arises from a prolonged correspondence and conversation with a haulier who wrote saying that he Was concerned about the revenue he was getting from the operation of a 10-ton .oil-engined six-wheeler. The vehicle , was regularly engaged . between London and Birmingham carrying .loads in both directions, making two round journeys per week and covering 480 miles.
Referring to Table V in "The Commercial Motor" Tables of Operating Costs, the recommended minimum charge for a vehicle of this type running 500 miles per week _should be Is. 101d per mile. This haulier stated: " I have been getting £1 (is. per ton from Birmingham to London; and it per ton trona Loodon to Birmingham. That is £23 for the round trip. The revenue per mile is Is. lid., or .!,d. per mile more than is recommended in the Tables.
. " My books show that during the whole Of 1949 I made a net profit barely in excess of £200 from the operation of that vehicle, which is not, in my opinion, enough. Will you please explain to me how this comesabout, or alternatively, do you regard £200 per annum as sufficient profit?"
. .1 could not reply to his inquiry offhand, beyond being of the opinion that £200.per annum profit was not sufficient, and. turned to the -Tables to try to discover what the net profit ought to be..
Checking the Profit
Under the heading of " Total Operating Costs in Pence per Mife,7 the figure for 500 miles per week for a 10-tonner is 15.87d.. Deducting that from is. 101d. leaves 6.63d, which is the difference between the recommended revenue of Is. 101d. per mile and the net operating cost. For 500 miles per week that is £13 46s. 3d.—the amount of gross profit, comprising establishment costs and net profit, • Which this operator should make.
There ,is another check by taking the appropriate figure under the heading of " Total Cost of Operation Per Week to the Nearest Shilling and deducting it from the recommended minimum charge per week. These are set down in the Tables at £33 and £46 16s. respectively. The difference is £13, 16s.
I felt that I was in need of some more information, and 1 therefore wrote to this haulier and asked him if he had any figures for establishment costs. i pointed out that there seemed to be a reasonable margin of profit in £13 16s. if his establishment costs were not excessive.
He replied that his establishment costs were much lower than normal. The amounts quoted in my articles from time to:time were usually about 17s. 6d. per week • per ton -of payload, whereas his expenditure worked out -almost exactly
to I 2s. 6d., so that the establishment charges to be debited against his vehicle totalled £6 5s. per week.
" If I deduct that amount from £13 16s. 3d., the figure you gave me in your letter, I find that I should be making a net profit of £7 1 Is. 3d. per week." he said. "You have taken only is. 101d. per mile, the figures from the Tables, in your calculations, whereas as I informed you in my previous letter my revenue is Is. lid, per ton, and on that basis my net profit should be £8 12s. Id."
Shortly after receiving, his second letter, I was in his neighbourhood and so I called. "There is something curious about your figures," I said. "You say that you are making only about £4 per week net profit, whereas according to all reasonable 'calculations you should be making More than twice that, actually £8 I2s. Id. Perhaps there is something in the operating casts which we have missed. How do your figures compare with those in the Tables?"
" They can he said to be the same, with the exception of one item," was the reply. I asked him to elaborate, and he replied: "The fuel cost is nearly, the same. This vehicle averages 12 m.p.g. and I pay 2s. 61d. per gallon for fuel oil, which means that my cost per mile is almost 2.53d. as set out in the Tables.
The cost for lubricants is rather less than the amount in the Tables, but as this is practically a hew vehicle and the oil consumption is likely to increase as time goes on, make provision for that by debiting the full amount as given in the Tables.
"The same holds with regard to maintenance. My expenditure on repairs and adjustments has up to now been practically negligible, but I quite realize such a state of affairs cannot last throughout the life of the vehicle, and for the time being at any rate I am providing for 'the future by setting aside the amount quoted in the Tables for maintenance (e); that is, 1..49d„ but I am calling it 11d. per Mile. I have taken very little out of that fund -up 'to now, My 'expenditure on maintenance (d). is about the:-same as yiiitr figures."
" What about depreciation?" I asked.
"I am following the same practice there as for the other items. I am building up a reserve at the rate of 30. per mile, compared with 3.68d. in the Tables, against the time when I shall have to get rid of this vehicle and buy a new one."
" That leaves only tyres out of the running costs. What about those?"
" There I have been unlucky. I have had to buy six new covers during 1949. That, however, was because of taking loads in and out of an area where the roads were unmade. and there were a lot of sharp stones so that the tyres were badly cut up. Even there; however, I am not debiting the whole of the amount against the vehicle, but am working on estimated .figures."
"In fact, then, you are working on The Commercial Motor' running-cost figures and not on your experience."
" Yes, so. far. It is not going to be a permanency. I adopted that plan because this is a vehicle of a type of which I have had no experience. I am keeping accurate records of costs and will, possibly, at a later date find myself in a position to substitute my own figures for the estimated figures taken from the Tables, The point that 1 am trying to make at present is that notwithstanding that my figures of operating cost are no greater than those quoted in the Tables, the profit I am earning is inadequate,
Insurance Differs •
"By the way, I have forgotten. There is one item which is different from the figure in the Tables-insurance. My insurance costs me £78 per year, approximately 30s. per week, so that I am 18s. per week higher than the figure in the Table for total operating costs."
I replied: "Even that reduces your net figures from £8 12s. Id. to only £7 14s.":1d. That is approximately £360 a year, so that if you are finding a profit of only £200, that leaves £160 to be accounted fon t examined his mileage figures and found that the total mileage for the year was only 20,280. "There is something wrong here," I said. "If you have been doing 480 miles for 50 weeks you should have run 24,000 miles."
"That is easily accounted for," he replied. "There are occasional weeks when I do only one journey instead of two, and there are times when the works in Birmingham from which I collect my traffic to London have nothing for me."
"That is where your money has goite," I answered. "If there be occasions when your week's mileage is below 480, obviously your annual takings are going to fall," " But if I do not run the vehicle, there are no operating costs, so I should not have lost a tremendous amount on that account," he countered.
Overhead Costs Remain " What you should have said," I replied, "is that there are no running costs. There are some operating costs and there is the expenditure of establishment costs. Look at it like this. In the ordinary way, your total expenditure is £38 18s. per week, thar is when you are running the full 480 miles. That is made up of £31 15s. vehicle operating costs (480 miles per week at 15.87d. per mile) according to the Tables, plus 18s, for insurance and £6 5s. establishment costs. In a full week you earn £46 and your net profit is £7 2s., as already reckoned." (The reason for the discrepancy of £7 2s. against £7 14s. Id. is that certain approximations have been made in the calculations.)
"Now," I continued, "in a week when you have only half the mileage your standing charges are still the same, that is to say, £11 8s. from the Tables, plus the 18s. difference in insurance, making £12 6s. in all. Your establishment costs are unaffected, that is another £6 5s., so that your fixed expenditure alone stands at £18 11s. per week. In addition, you run 240 miles at 15.87d. per mile, which is £15 17s. 6d., so that your total expenditure is £34 8s. 6d. On the other hand, your revenue is only £23, so that during that week you show a loss of £11 8s. 6d. If that happens for 15 or 16 weeks you have lost £160 to £170."
" I begin to see what you mean, but I feel I must make that amount up somehow and I want to know how I can provide against such a loss in the future and yet apply the 'fables logically." "That is comparatively easy if you bear in mind that the figure for miles per week quoted in the Tables is presumed to be the average weekly payload mileage throughout the year, taking every week into consideration and not forgetting those weeks in which the mileage is diminished. in your case, the vehicle actually covered only a little over 20,000 miles in the year, which is barely 400 per week.
Minimum Revenue "Your best plan is to take the figtires for the charge per mile from the Tables, that is to say 2s. 91d. per mile for 400 miles per week, and to assess your weekly earnings an that basis; 'if you do that you will find the minimum revenue must be £41 3s. per week. Furthermore, you must take into consideration those occasions on which your 'vehicle ran one way empty. Suppose you find, on looking. through your books, that light running one way happens 10 times in a year-, that is approximately 10 journeys in 200. Your earnings are thus only nineteen-twentieths of what they should be and must be increased by one-nineteenth, That .is to say you must add one-nineteenth of £46. That makes ft necessary for you to earn approximately £48 8s. 6d. pa week. That is 124 4s. per journey, an average of 24s. pet ton. You should get .say 27s. 6d. for the load from Birmingham and 21s. for that from London."
Pointing a Moral
This story exemplifies the difference in revenue which can result if there be any departure in practice from the
hypothetical basis of calculatim of costs. This operator assessed his costs and charges in the expectation that the . vehicle would run 480 miles per week, week in, week out, for 50 weeks in the „year. On that basis the net annual profit which he might expect to earn would be £360. There were some weeks when 240 instead Of 480 miles were run and he thought that that should not make any material difference to his total earnings. .
He forgot that during any week when that shOrtage of mileage occurs he would still be paying the same standing charges for the vehicle and establishment costs as when the full 480 miles were run The weeks when this difference in mileage occurred were sufficient in number to affect his total earnings seriously and to bring them nearly to an uneconomic level. .
Ellen when it seems likely that a regular 50 weeks' work will be available, it is wise to lake steps to provide against such contingencies as.occational loss of traffic, In this case, an allowance of at least 10 per cent. of the total would bee necessary for contingencies to ensure a minimum reasonable profit. S.T.R.