Question

You are a business owner of a firm that services trucks. A customer would like to rent a truck from you for one week, while you service his truck. You must decide whether or not to rent him a truck. You have an extra truck that you will not use for any other purpose during this week. This truck is leased for a full year from another company for $300/ week plus $.50 for every mile driven. You also have paid an annual insurance premium, which costs $50/ week to insure the truck. The truck has a full 100-gallon fuel tank. The customer has offered you $500 to rent the truck for a week. The price includes the 100 gallons of fuel that is in the tank. It also includes up to 500 miles of driving. The customer will pay $.50 for each additional mile that he drives above the 500 miles. You anticipate that the customer will bring back the truck with an empty fuel tank and will have driven more than 500 miles. You sell fuel to truckers at a retail price $3.35/gallon. Any fuel you sell, or use can be replaced at a wholesale price of $2.95/gallon. The customer will rent a truck from another company if you do not accept the proposed deal. In either case, you will service his truck. You know the customer and are confident that he will pay all charges incurred under the agreement.

1. Should you accept or reject the proposed deal? Why, or why not? Show calculations.

2. Would your answer change if your fuel supplier limited the amount of fuel up to 100 gallons/ week you could purchase from him at the wholesale price? Explain.

Answer 1

1.Should you accept or reject the proposed deal
Cost of Lease per week	$300
Insurance premium per week	$50
Total cost related to truck per week	$350
This cost is fixed cost that has to be paid by the business owner whether he lease or not the truck
If he will not rent the truck
he will sell the fuel at a retail price $3.35/gallon
Selling price of 100 gallons	$335
Cost of 100 gallons	$295
Profit on sell of fuel-100 gallons	$40
If he will rent the truck
Rent of truck for a week	$500
Less: lease rent for 500 miles @$0.50 per mile	$250
Less: Cost of fuel-100 gallons	$295
Loss from renting of truck	($45)
Thus he is loosing $45 from renting of truck as against profit of $40 from selling the fuel
If the customer drive more than 500 miles he will earn $0.50 every mile driven,
thus the prososed deal is acceptable if it is anticipated that the truck will be driven atleast 200 miles more than
500 miles, then the profit will be $55 ((200 miles x $0.50)-$45)
2. If the fuel supplier limited the fuel supply to 100 gallons per week, the decision will change
as the business owner can either refill the truck at wholesale price or the fuel he sell at retail price
The business owner will surely earn $40 from sell of fuel, thus it is recommended to reject the proposed deal