Question

Calculating costs and gains

A company has twelve trucks, each generating $ 500 net profit per week. On average each truck will have an accident due to faulty brakes once every nine months.

These accidents result in the truck being off the road for two weeks. In addition to the repair costs averaging $ 350 each time, the trucks are not generating revenue. Damaged trucks can be replaced by hiring replacement vehicles at $ 400 per week.

Faulty brake accidents could be eliminated by more frequent maintenance checks, but this would cost an additional $ 125 per truck, per month. Eliminating these accidents would qualify the company for a reduction of 5% in its annual insurance costs of $ 2,700 per truck.

In light of the guidance to company directors and board members about leading and managing health and safety in their organisations, outline the financial case for either making this expenditure or not.

Answer 1

No of accidents in a year = (No. of vehicles * No of months in a year) / Average period of one accident

= (12 * 12) / 9

= 16 accidents in a year

Cost of One accident = Average repair cost + (Cost of replacement vehicle per week * No. of weeks trucks being off the road)

Cost of one accident = $350 + ($400 * 2)

Cost of one accident = $1,150

Total costs without insurance = No of accidents * Cost of One accident

= 16 * $1,150

   = $18,400

Total costs with insurance = (No. of trucks * maintenance cost per truck * No. of Months) - Savings in annual insurance costs

= (12 * $125 * 12) - [(5% of $2,700) * 12]

= $18,000 - $1,620

= $16,380

Conclusion: The company should opt for making the expenditure because the cost to company with regular maintenance has less cost involved and moreover it will help the company to improve the health and safety standards in their organisation.