Hybrid cars are certainly a "green" alternative; however, the financial aspects of hybrid ownership dont always make sense. For example, they cost more, but they also get better mileage. You might ask yourself whats the number of miles I need to drive to break-even on the hybrid if I purchase it?

To address this question, lets suppose you are considering the purchase of a hybrid vehicle. Assume the following facts:

• The hybrid will cost $3,200 more than a traditional gasoline-only model. (Note: for purposes of this scenario, you should think of this amount as the fixed cost related to the hybrid.)
• The hybrid will get 40 miles per gallon of gas, and the traditional vehicle will get 30 miles per gallon.
• The cost of gasoline is $2.40 per gallon.

Required:

Use the facts above, and your knowledge of CVP analysis, to answer the following questions. Please feel free to ask me if you need any clarification:

1. What is the variable gasoline cost of driving one mile in the hybrid vehicle? What is the variable gasoline cost of driving one mile in the traditional vehicle? Provide both answers.
2. Using the information in requirement part (1), express the variable cost savings of driving the hybrid vehicle on a per-mile basis.
3. Using the information in requirement part (2), determine how many miles would you have to drive in order to break-even on your investment in the hybrid vehicle. (Note: for purposes of this scenario, you should think of the variable cost savings in part (2) as the contribution margin per mile of the hybrid vehicle.)
4. What other factors might you want to consider in making your decision?