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 second hand 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?