Break Even Point Calculation

[sarathpillai]

I am in a state of confusion. I work for a car rental firm and I need to know the break even point . Assume we have only one type of car and all vehicle will be sold after 2 years. Values available - Number of rentals, Rate per rental, Business overhead for this vehicle, Maintenance cost for this vehicle. Do we take into account the vehicle initial cost, its depreciation and resale value. All vehicles will be sold after 2 yrs. You can use fictious value for explanation. Thanks in advance!!!

 

[Deleted member 4993]

I am in a state of confusion. I work for a car rental firm and I need to know the break even point . Assume we have only one type of car and all vehicle will be sold after 2 years. Values available - Number of rentals, Rate per rental, Business overhead for this vehicle, Maintenance cost for this vehicle. Do we take into account the vehicle initial cost, its depreciation and resale value. All vehicles will be sold after 2 yrs. You can use fictious value for explanation. Thanks in advance!!!

You need to define your problem a little better.

Break-even point of what -
number vehicles in hand?
Price of used vehicle?

What are your thoughts?

 

[sarathpillai]

I would like to know, the number of vehicles needed to break even. The vehicles must also cover business overheads as well.

 

[sarathpillai]

Formula

So the equation When I have a total of N cars of same model in my agency would be ,
N( vehicle cost - Resale value + maintenance & repair cost) +Business overhead = Rate per day * no. of rental days.
Is there any other factors that I could have possibly missed?
I am planning to sell car in 2yrs or 100000 KMS whichever comes first....

 

[JeffM]

So the equation When I have a total of N cars of same model in my agency would be ,
N( vehicle cost - Resale value + maintenance & repair cost) +Business overhead = Rate per day * no. of rental days.
Is there any other factors that I could have possibly missed?
I am planning to sell car in 2yrs or 100000 KMS whichever comes first....

Two problems. One of which makes the problem AS POSED insoluble. I shall give you a solution as soon as you tell me what the business overhead is in money for 100,000 km. You can put a number on business overhead for a year or two years, but not on 100,000 km because the whole idea of business overhead is that it varies with time but not the volume of business.

A second problem, and the one that cannot be answered with free advice from the internet, is this. The number of rental days that you can reasonably expect per car is dependent on how many cars you have in inventory.

If you ignore both problems, a reasonable solution is this:

Let n = break even number of cars, p = purchase price per car, s = sale's price in second hand market per car, i = insurance cost per car for two years, m = maintenance cost per car for two years, b = business overhead for two years, r = rate per day rented, and d = number of days a car is rented over two years.

\(\displaystyle If\ (r * d) > (i + m + p - s) \implies n * r * d - \{b + (n * \{i + m + (p - s)\})\} = 0 \implies n = \dfrac{b}{(r * d) + s - i - m - p}.\)

However, ignoring the issue that the number of rental days per car is almost certainly dependent on the number of cars in inventory means that the formula above will almost certainly generate a number that is too high, perhaps way too high. That is, if you use that formula, you will end up with a lot of seldom-used cars mostly sitting on the lot. If this were a consulting gig for me, it is working on this part of the process that would justify my outrageous fees.

 

[sarathpillai]

Hey Jeff, I must admit that you are **** of a consultant... Thanks for the solution. Effectively my formula is gonna be:
When I have a total of N cars in my agency would be ,
N( Average vehicle cost - Average Resale value + Average maintenance & repair cost) +Business overhead =N( Average Rate per day * Average no. of rental per car)

All these averaged data and business overhead is available with Finance ( or at least I think so...)

Cheers,
Sarath