Car Purchasing: Cost-Volume-Profit Analysis Essay
Introduction
Table of Contents
The current paper presents the Cost-Volume-Profit analysis (CVP) of a decision to purchase a car. There are two cars, including traditional and hybrid, which are available at different prices. The critical element of the analysis is to assess which of the two models is beneficial for the buyer. Although the prices of these models are different, it is essential to determine their benefits.
Variable cost
The variable cost per mile can be calculated by dividing the cost per gallon by the number of miles per gallon for each model.
Table 1. Calculation of the Variable Cost of Gasoline.
| Variable Cost of Gasoline per Mile of the Hybrid Car | |
| Miles per gallon (Hybrid) | 30.0 |
| Cost per gallon | $3.6 |
| $3.6/40 | $0.09 |
| Variable Cost of Gasoline per Mile of the Traditional Car | |
| Miles per gallon (Traditional) | 40.0 |
| Cost per gallon | $3.6 |
| $3.6/30 | $0.12 |
Table 1 indicates that the traditional car has a higher variable cost per mile as compared to the hybrid model.
Contribution Margin
The contribution margin of the hybrid car relative to the traditional vehicle is calculated by subtracting its variable cost per mile from that of the traditional car. Therefore, the variable cost saving on each mile is $0.03 for the hybrid model, as given in Table 2.
Table 2. Calculation of Per Mile Saving.
| Per mile saving | |
| The variable cost of gasoline per mile of the hybrid car | $0.09 |
| The variable cost of gasoline per mile of the traditional car | $0.12 |
| $0.12 – $0.09 | $0.03 |
Break-even Analysis
The break-even point is calculated by calculating the difference between the fixed costs of the two vehicles and then dividing it by the contribution margin (Shim, 2016). In this case, the difference between the fixed costs of the two cars is $4,500 which is divided by the saving per mile in Table 3.
Table 3. Calculation of the Break-Even Level.
| Break-even Level | |
| The difference in Fixed Cost | $4,500.0 |
| Per mile saving | $0.03 |
| $4,500/0.03 | 150,000 miles |
Other Factors
The analysis indicates that the purchase of the hybrid car is beneficial for the buyer. However, three different factors also have a direct impact on the purchase decision.
Additional Expenses or Charges
It is important to determine additional expenditures that are likely to incur after the purchase of a car (Mowen, Hansen, & Heitger, 2015). These expenses include insurance costs, repair, license fees, etc. It is possible that the maintenance cost of the hybrid car is higher than the traditional car due to its sophisticated technology. Furthermore, the resale value of hybrid cars should also be considered in the decision-making to avoid the risk of a loss.
Rebates for Hybrid Cars
Many countries promote hybrid cars to reduce their carbon emissions. It is possible that the government may provide subsidies to the manufacturers of hybrid vehicles to lower their prices which will also attract consumers benefiting from their low cost and high mileage (Mowen et al., 2015). Therefore, this factor is also important to consider in the cost-volume-profit analysis.
Non-financial Factors
Non-financial factors refer to social and environmental factors that have an indirect impact on the purchase of products and services (Shim, 2016). In this case, the significant factor is that individuals prefer to buy hybrid cars to reduce their carbon footprint. Furthermore, scarcity of natural resources is also an essential factor in such decisions as consumers buy less of a product that has an adverse effect on the depletion of resources such as oil.
References
Mowen, M. M., Hansen, D. R., & Heitger, D. L. (2015). Cornerstones of managerial accounting (6th ed.). Mason, OH: Cengage Learning.
Shim, J. K. (2016). Accounting and finance for the nonfinancial executive: An integrated resource management guide for the 21st century. London, UK: CRC Press.
