Question

Cost-volume-profit analysis can also be used in making personal financial decisions. For example, the purchase of a new car is one of your biggest personal expenditures. It is important that you carefully analyze your options.

Suppose that you are considering the purchase of a hybrid vehicle. Let’s assume the following facts. The hybrid will initially cost an additional $6,000 above the cost of a traditional vehicle. The hybrid will get 30 miles per gallon of gas, and the traditional car will get 20 miles per gallon. Also, assume that the cost of gas is $2.40 per gallon.

Hybrid car Traditional car Variable gasoline cost 0.12 0.08

Answer 1

Solution:

a) Variable gasoline cost of going one mile in the hybrid car = $0.08

    Variable gasoline cost of going one mile in the traditional car = $0.12

b) Contribution margin of hybrid vehicle relative to the traditional vehicle = $0.04

c) Break-even point of hybrid vehicle would be 150,000 miles more than the traditional vehicle.

d) Other factors which might be considered, would include:

     Cost of maintenance

     Environmental standards

     Safety and reliability

     Frequency of service

Explanation:

a) Hybrid car uses 30 miles per gallon of gas per gallon cost of gas = $2.40

Variable gasoline cost of going one mile in the hybrid car = $2.40 / 30 = $0.08

Traditional car uses 20 miles per gallon of gas

Per gallon cost of gas = $2.40

Variable gasoline cost of going one mile in the traditional car = $2.4 / 20 = $0.12

b) Contribution margin of hybrid vehicle relative to the traditional vehicle = $0.12 - $0.08 = $0.04

Variable cost saving in case of hybrid vehicle, as compared to traditional vehicle = $0.04

c) Hybrid vehicle cost $6,000 more than the traditional vehicle.

In case, traditional car costs $6,000 then hybrid vehicle will cost $6,000 in addition to the cost incurred on traditional vehicle. Therefore $6,000 will be considered as fixed costs supposed to be incurred in relation to hybrid vehicle.

Break-even point = Fixed cost of hybrid vehicle in relation to traditional vehicle / Contribution margin per unit

= 6,000 / 0.04

= 150,000

d) While planning for the purchase of hybrid vehicle over traditional vehicle, other than cost of purchase, the annual charges of maintenance of vehicle should be taken into consideration. In case if the cost of maintenance is high as compared to cost of purchase, the in depth analysis of the decision is necessary.

The vehicles should be environmental friendly and should meet the environmental standards. Safety and reliability of vehicle is also important to consider while planning to opt for the decision.

Answer 2

In the question we want to find out how many miles would the hybrid car would taken to break even the investment made in the hybrid car that is 6000;

Given informations are;

Additional investment on hybrid car = $6000

Variable gasoline cost on hybrid car = $.08/mile

Variable gasoline cost on traditional car = $0.12/mile

So savings on hybrid car per mile = $0.12-$.08

= $ 0.04/mile

Equation for finding Break even point in units = Total fixed cost/Contribution margin per unit ( TFC /CM per unit)

Here Fixed cost =$6000 (additional investment made in hybrid car)

Savings per mile can be taken as CM per unit

Savings per mile = $.04/mile

So BEP in miles = Additional investment made in hybrid car / Savings per mile

= 6000/.04

= 150000 miles

So;150000 miles have to be covered in order to break even the investment made in the Hybrid car.