Hello John,
I will try to make it clear for you. Consider this question as a comparision of 2 alternatives. The first big assumption is regarding the revenues: you are gonna use the single decker bus in the routes with low number of passenger, assuming that you can serve exactly the same amount of customers with a single decker bus.
Hence you have to do the following comparision:
- Use Double decker buses: Revenues=X and Cost=Y=61£/trip
- Use Single decker buses: Revenues=X, Cost=Z=41£/trip and Bus price=420k£
The usage of single decker buses is convenient only if the cost saving (Y-Z) allows you to payback the initial investment (Bus Price) in less then 3 years:
- Bus price / (Y - Z) = 420k£ / (61-40) £/trip = 9500 trips --> Less then 3 years --> Ok
NB: The initial hypothesis regarding the revenues is not a given, that's why there is an additional comment on the solution:
One risk to consider is the potential revenue impact due to lower capacity, hence we need to be careful when selecting routes / times to operate with a single decker.
Does it make sense?
Best,
Luca
Thank you Luca for your explanation. I still do not understand why we use the cost saving (Y-Z) to payback the initial investment. We have the exhibit 2 - showing all the passengers in each route/hour, and we have the # of hours, and thus we can calculate the revenue per day. Assume the total number of passengers are the same after change the bus, we can have the revenue X/day. Then use 420k/(X-cost) to obtain the days (m) for payback. use m/350 to get the year.