Question

Case study 6.2: Converting to LPG – is it worth it.

Green fuel runs out of gas5

The cost of converting a car to run on liquefied petroleum gas (LPG) is about £1,500 in the UK, towards which a government grant would contribute about £700. From September 1 2004, LPG will on average cost 40.7p per litre, compared with 79.1p for ordinary unleaded petrol. However, LPG cars usually have slightly worse fuel consumption, losing about 13% in terms of miles per gallon.

Questions

Fast-Trak company owns a fleet of 20 cars, which are bought new and are used for 30,000 miles over two years before being sold off. The cars average 30 miles

to the gallon (imperial) on petrol. The conversion to LPG does not affect the price in the secondhand market.

1 Calculate the profit contribution per hundred miles of LPG compared with unleaded petrol, for one of Fast-Trak’s cars.

2 Calculate the break-even mileage for the cars with the LPG conversion.

3 Calculate the effect on the profit of Fast-Trak of converting to LPG.

4 The government wants to encourage the use of LPG to protect the environment by reducing the break-even mileage to 10,000 miles; how large a grant should it offer for the LPG conversion?

Answer 1

1, Mileage from petrol 30 miles, and from LPG 13% less, i.e., 87%x30 = 26.1 miles

Price of petrol / litre = 79.1p

Cost per 100 miles on petrol = 79.1 * 100 / 30 = 263.67p

Price of LPG / litre = 40.7p

Cost per 100 miles on LPG = 40.7 * 100 / 26.1 = 155.94p

Hence profit contribution of LPG as compared to petrol = 263.67 - 155.94 = 107.73p

2. Break even is the number of 100 miles that recovers the cost of conversion to LPG. Cost of conversion to LPG, after deducting the Govt subsidy = 1,500 - 700 = 800 pounds

Contribution of LPG per 100 miles 107.73p or 1.08 pounds

Break even point = 800 / 1.08 = 742.61 x 100 miles = 74,261 miles

3. If this company converts all 20 cars to LPG its cost of conversion will be 800 * 20 = 16000 pounds  

Savings by using LPT for one car running 30,000 miles = 1.08 * 300 = 324 pounds

Savings from 20 cars = 324 * 20 = 6480 pounds

Impact on profits = 6480 - 16000 = -9520 pounds (reduction in profit)

4. If the break even point needs to change to 10000 miles then the subsidy has to be so much that the effective cost of conversion to anyone is:

Contribution from LPG per 100 miles X 100 = 1.08 x 100 = 108 pounts

Cost of conversion (prior to subsidy) = 1500 pounds

Hence the subsidy will need to be 1392 pounds (1500 - 108)