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Car Purchasing: Cost-Volume-Profit Analysis Essay

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Updated: Jun 19th, 2021

Introduction

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 that 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 cost, repair, and license fee, 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 that 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 the 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.

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IvyPanda. (2021, June 19). Car Purchasing: Cost-Volume-Profit Analysis. https://ivypanda.com/essays/car-purchasing-cost-volume-profit-analysis/

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"Car Purchasing: Cost-Volume-Profit Analysis." IvyPanda, 19 June 2021, ivypanda.com/essays/car-purchasing-cost-volume-profit-analysis/.

1. IvyPanda. "Car Purchasing: Cost-Volume-Profit Analysis." June 19, 2021. https://ivypanda.com/essays/car-purchasing-cost-volume-profit-analysis/.


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IvyPanda. "Car Purchasing: Cost-Volume-Profit Analysis." June 19, 2021. https://ivypanda.com/essays/car-purchasing-cost-volume-profit-analysis/.

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IvyPanda. 2021. "Car Purchasing: Cost-Volume-Profit Analysis." June 19, 2021. https://ivypanda.com/essays/car-purchasing-cost-volume-profit-analysis/.

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IvyPanda. (2021) 'Car Purchasing: Cost-Volume-Profit Analysis'. 19 June.

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