This extract from a newspaper article discusses the full cost of absorbing operating costs.

TRANSPORT group Go-Ahead expects a hit to profits from its bus business after failing to recover £2.5m of additional fuel costs, although the company expects overall group profits to be in line with expectations. The Newcastle firm, which with a fleet of 3,400 buses is one of the UK’s biggest operators, said it was looking to cut costs. Some vacancies were not being filled.

The company said fuel costs were likely to increase by £10m in the year to the end of June 2009 after this year’s oil price spike at $145 a barrel. It has recovered £5m of the estimated £7.5m increase in the first half through fare rises and efficiency improvements, but the company said this still left £2.5m of unrecovered fuel costs.

In a trading update for the six months to the end of this month, the company said its performance should be in line with expectations for the full year to June, despite the ailing UK economy. Finance director Nick Swift said the company had been cost-cutting to weather the downturn and was also protected by regulated fare increases. ‘We saw this coming, although we may not have seen it being as grim as it is . . . like-for-like costs are down a couple of per cent on a year ago.’ Go-Ahead hedged its fuel for the year at 43p a litre, compared with 34p a litre in 2007/08. It has hedged 50% of the following year at 52p, but expects to hedge the rest of its requirements at a lower price.

Questions

1 What kinds of overhead costs are likely to be involved in bus operation?
2 The company uses hedging transactions (advance purchase) to eliminate the unpredictable nature of the cost of fuel. What other operating costs might have an element of unpredictability?