Question

Suppose that you are considering the purchase of a hybrid vehicle. Let's assume the following facts. The hybrid will initially cost an additional $4,500 above the cost of a traditional vehicle. The hybrid will get 40 miles per gallon of gas, and the traditional car will get 30 miles per gallon. Also, assume that the cost of gas is $3.60 per gallon.

Instructions

Using the facts above, answer the following questions.

a. What is the variable gasoline cost of going one mile in the hybrid car? What is the variable cost of going one mile in the traditional car?

b. Using the information in part (a), if “miles” is your unit of measure, what is the “contribution margin” of the hybrid vehicle relative to the traditional vehicle? That is, express the variable cost savings on a per-mile basis.

c. How many miles would you have to drive in order to break even on your investment in the hybrid car?

d. What other factors might you want to consider?

e. Show all necessary computation to receive credit.

Answer 1

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a.

Hybrid car goes 40 miles per gallon of gas

cost of gas is $3.60 per gallon

To go 40 miles it costs $ 3.60

To go 1 mile it costs = $ 3.60 / 40

variable gasoline cost of going one mile in the hybrid car = $ 3.60 / 40

variable gasoline cost of going one mile in the hybrid car = $ 0.09

variable cost of going one mile in the traditional car = $ 3.60 / 30

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

b.

The “contribution margin” of the hybrid vehicle relative to the traditional vehicle = $ 0.12 - $ 0.09

The “contribution margin” of the hybrid vehicle relative to the traditional vehicle = $ 0.03

variable cost savings of hybrid car in comparison to traditional car on a per-mile basis = $ 0.03

c.

break even on your investment in the hybrid car

suppose the traditional car costs $ 4500 then the hybrid car costs $ 4500 more than traditional car

Break even point = Fixed cost relative to traditional car / contribution per unit

Break even point = $ 4500/ $ 0.03

Break even point = 150,000 miles more than traditional car

4.

The other factors to be considered are cost of maintenance , safety & reliability , environmental standards , promptness of service etc .

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