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COMPARISON OF INDIRECT COST MULTIPLIERS FOR VEHICLE MANUFACTURING

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In the process of manufacturing and selling vehicles, a manufacturer incurs certain costs. Among these costs are those incurred directly as a part of manufacturing operations and those incurred indirectly in the processes of manufacturing and selling. The indirect costs may be production- related, such as R&D and engineering; business-related, such as corporate staff salaries and pensions; or retail-sales-related, such as dealer support and marketing. These indirect costs are recovered by allocating them to each vehicle. Under a stable, high-volume production process, the allocation of these indirect costs can be approximated as multipliers (or factors) applied to the direct cost of manufacturing. A manufacturer usually allocates indirect costs to finished vehicles according to a corporation-specific pricing strategy. Because the volumes of sales and production vary widely by model within a corporation, the internal corporate percent allocation of various accounting categories (such as profit or corporate overhead) can vary widely among individual models. Approaches also vary across corporations. For our purposes, an average value is constructed, by means of a generic representative method, for vehicle models produced at high volume. To accomplish this, staff at Argonne National Laboratory’s (ANL’s) Center for Transportation Research analyzed the conventional vehicle cost structure and developed indirect cost multipliers for passenger vehicles. This memorandum summarizes the results of an effort to compare and put on a common basis the cost multipliers used in ANL’s electric and hybrid electric vehicle cost estimation procedures with those resulting from two other methodologies. One of the two compared methodologies is derived from a 1996 presentation by Dr. Chris Borroni-Bird of Chrysler Corporation, the other is by Energy and Environmental Analysis, Inc. (EEA), as described in a 1995 report by the Office of Technology Assessment (OTA), Congress of the United States. The cost multipliers are used for scaling the component costs to retail prices.
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COMPARISON OF INDIRECT COST MULTIPLIERS
FOR VEHICLE MANUFACTURING



Technical Memorandum
in support of
Electric and Hybrid Electric Vehicle Cost Estimation Studies


by
Anant Vyas, Dan Santini, and Roy Cuenca

Center for Transportation Research
Energy Systems Division
Argonne National Laboratory
9700 South Cass Avenue
Argonne, Illinois 60439




April 2000




Work Sponsored by United States Department of Energy
Assistant Secretary for Energy Efficiency and Renewable Energy
Office of Transportation Technologies


Disclaimer
This report was prepared as an account of work sponsored by an agency of the
United States Government. Neither the United States Government nor any agency
thereof, nor The University of Chicago, nor any of their employees or officers,
makes any warranty, express or implied, or assumes any legal liability or
responsibility for the accuracy, completeness, or usefulness of any information,
apparatus, product, or process disclosed, or represents that its use would not
infringe privately owned rights. Reference herein to any specific commercial
product, process, or service by trade name, trademark, manufacturer, or otherwise
does not necessarily constitute or imply its endorsement, recommendation, or
favoring by the United States Government or any agency thereof. The views and
opinions of document authors expressed herein do not necessarily state or reflect
those of the United States Government or any agency thereof, Argonne National
Laboratory, or The University of Chicago.



COMPARISON OF INDIRECT COST MULTIPLIERS
FOR VEHICLE MANUFACTURING

INTRODUCTION

In the process of manufacturing and selling vehicles, a manufacturer incurs certain costs. Among
these costs are those incurred directly as a part of manufacturing operations and those incurred
indirectly in the processes of manufacturing and selling. The indirect costs may be production-
related, such as R&D and engineering; business-related, such as corporate staff salaries and
pensions; or retail-sales-related, such as dealer support and marketing. These indirect costs are
recovered by allocating them to each vehicle. Under a stable, high-volume production process,
the allocation of these indirect costs can be approximated as multipliers (or factors) applied to the
direct cost of manufacturing. A manufacturer usually allocates indirect costs to finished vehicles
according to a corporation-specific pricing strategy. Because the volumes of sales and production
vary widely by model within a corporation, the internal corporate percent allocation of various
accounting categories (such as profit or corporate overhead) can vary widely among individual
models. Approaches also vary across corporations. For our purposes, an average value is
constructed, by means of a generic representative method, for vehicle models produced at high
volume. To accomplish this, staff at Argonne National Laboratory’s (ANL’s) Center for
Transportation Research analyzed the conventional vehicle cost structure and developed indirect
cost multipliers for passenger vehicles.

This memorandum summarizes the results of an effort to compare and put on a common basis
the cost multipliers used in ANL’s electric and hybrid electric vehicle cost estimation procedures
with those resulting from two other methodologies. One of the two compared methodologies is
derived from a 1996 presentation by Dr. Chris Borroni-Bird of Chrysler Corporation, the other is
by Energy and Environmental Analysis, Inc. (EEA), as described in a 1995 report by the Office
of Technology Assessment (OTA), Congress of the United States. The cost multipliers are used
for scaling the component costs to retail prices.

ANL METHODOLOGY

The ANL methodology described here is based on an analysis concerned with electric vehicle
production and operating costs (Cuenca et al. 2000; Vyas et al. 1998). The analysis evaluated the
cost structure for conventional vehicle manufacturing and retailing and assigned shares of the
manufacturer’s suggested retail price (MSRP) to various cost contributors. Multipliers developed
from the ANL methodology are applied to the manufacturing cost of an individual component in
order to scale the component cost to the retail price. Several cost contributors are included in the
methodology, as summarized in Table 1.
Some of the vehicle components for electric and hybrid electric vehicles would be procured from
outside suppliers. This assumption is applied to electric drive components, excluding the battery;
the vehicle manufacturer would produce the rest. Thus, two cost multipliers, one for the
components manufactured internally and the other for outsourced components, are necessary to
estimate the price of electric and hybrid electric vehicles. Outside suppliers would incur some of the
costs normally borne by the vehicle manufacturer. In the ANL methodology, we assume that the
costs of “Warranty,” “R&D/Engineering,” and “Depreciation and Amortization” are borne by the
Page 1


suppliers of outsourced components. The outside suppliers would include these costs in their prices.
The following two cost multipliers are computed by using “Cost of Manufacture” as the base:


Cost multiplier for components manufactured internally = 100/50 = 2.00.

Cost multiplier for outsourced components = 100/(50 + 6.5 + 5.5 + 5) = 1.50.

Table 1 Contributors to Manufacturer’s Suggested Retail Price in ANL Methodology
Cost Category
Cost Contributor
Relative to
Share of
Cost of Vehicle MSRP
Manufacturing
(%)
Vehicle Manufacturing
Cost of Manufacture
1.00
50.0
Production Overhead
Warranty 0.10
5.0
R&D/Engineering 0.13
6.5
Depreciation and Amortization
0.11
5.5
Corporate Overhead
Corporate Overhead, Retirement and
0.14 7.0
Health
Selling Distribution,
Marketing,
Dealer
0.47 23.5
Support, and Dealer Discount
Sum of Costs

1.95
97.5
Profit Profit
0.05
2.5
Total Contribution to
2.00
100.0
MSRP

METHODOLOGY DERIVED FROM BORRONI-BIRD PRESENTATION

In his presentation, entitled “Automotive Fuel Cell Requirements,” at the 1996 Automotive
Technology Development Customers’ Coordination Meeting, Borroni-Bird included charts on the
“Typical American Automobile: Price/Cost Breakdown.” The charts provided a graphical
breakdown of vehicle price, showing cost contributors and profit. We used the charts to arrive at
percentage shares of vehicle price by various contributors. Table 2 shows the resulting allocation.
Page 2


Table 2 Price/Cost Breakdown Based on Borroni-Bird Presentation

Cost Category
Cost Contributor
Relative to Cost of
Share of
Vehicle
MSRP
Manufacturing
(%)
Vehicle
Material Cost a 0.87
42.5
Manufacturing Assembly Labor and Other Manufacturing
0.13 6.5
Costs a
Fixed Cost
Transportation/Warranty 0.09
4.5
Amortization and Depreciation, Engineering
0.44 21.5
R&D, Pension and Health Care,
Advertising, and Overhead
Selling
Price Discounts
0.10
5.0
Dealer Markup
0.36
17.5
Sum of Costs

1.99
97.5
Profit Automobile
Profit
0.06
2.5
MSRP
2.05
100.0
a These two contributors are scaled to sum to 1 in the third column, as in Table 1.

In his presentation, Borroni-Bird did not evaluate the treatment of in-house or outsourced
components. His methodology does not lend itself to easy computation of cost multipliers
comparable with those in the ANL methodology, unless we make a few assumptions. We have
assumed that “Material Cost,” taken together with “Assembly Labor and Other Manufacturing
Costs,” would form the “Vehicle Manufacturing” base for the in-house components. The costs of
“Transportation/Warranty,” “Amortization and Depreciation,” and “Engineering R&D” would be
borne by the suppliers of outsourced components. However, “Amortization and Depreciation” and
“Engineering R&D” costs were merged with “Pension and Health Care,” “Advertising,” and
“Overhead” costs by Borroni-Bird. We assumed that half of the costs under this category would be
borne by the suppliers of outsourced components. Our assumptions led to the following cost
multipliers:


Cost multiplier for components manufactured internally = 100/(42.5 + 6.5) = 2.05.

Cost multiplier for outsourced components = 100/(42.5 + 6.5 + 4.5 + 10.75) = 1.56.

These cost multipliers are very similar to those computed with the ANL methodology.

Comparison of ANL and Borroni-Bird Methodologies

The information from Tables 1 and 2 is shown in terms of cost categories in Table 3. Both
methodologies use vehicle manufacturing cost as the base and add other costs to it. The share of
MSRP attributable to “Vehicle Manufacturing” is 50% in the ANL methodology, compared with
49% in the Borroni-Bird Methodology. Borroni-Bird combined several cost contributors under
“Fixed Cost.” These contributors include (see Table 2) “Amortization and Depreciation,”
“Engineering R&D,” “Pension and Health Care,” “Advertising,” and “Overhead.” Except for the
inclusion of “Advertising,” “Production Overhead” and “Corporate Overhead” in the ANL
methodology can be combined to form an equivalent category. ANL’s total of 24% by production
Page 3


and corporate overheads is slightly lower than the total of 26% by Borroni-Bird. The ANL category
of “Selling,” which includes “Distribution,” “Marketing,” “Dealer Support,” and “Dealer
Discount,” is broader than that of “Price Discounts” and “Dealer Markup” specified by Borroni-
Bird, and this category’s contribution is understandably slightly higher in the ANL methodology.
The share of MSRP by “Profit” is the same in both methodologies. The absolute differences,
computed as ANL value minus Borroni-Bird value, are 1% for “Vehicle Manufacturing,” –2% for
“Fixed Cost,” and 1% for “Selling” cost.

Table 3 Comparison of Vehicle Price/Cost Allocation by ANL and Borroni-Bird
Methodologies

ANL Methodology
Borroni-Bird Methodology
Cost Contributor or Category
Share of
Cost Contributor or Category
Share of
MSRP (%)
MSRP (%)
Vehicle Manufacturing
50.0
Vehicle Manufacturing
49.0
Production Overhead
17.0
Fixed Cost
26.0
Corporate Overhead
7.0
Selling 23.5
Selling 22.5
Sum of Costs
97.5
Sum of Costs
97.5
Profit 2.5
Automobile
Profit
2.5
MSRP 100.0
MSRP 100.0

EEA METHODOLOGY

The methodology of Energy and Environmental Analysis is summarized in the OTA report OTA-
ETI-638, entitled Advanced Automotive Technology: Visions of a Super-Efficient Family Car,
published in September 1995. The values of some cost contributors are not listed in the report.
Moreover, depreciation, amortization, and tooling expenses are assumed to be case-specific and
therefore must be computed for each case. In order to make the EEA and ANL methodologies
comparable, some assumptions were necessary. These assumptions are described in the summary
below.

The EEA cost equations can be simplified as follows:


Cost of Manufacture = Division Cost × [1 + Division Overhead]

Manufacturer Cost = [Cost of Manufacture + Assembly Labor + Assembly Overhead] ×
[1 + Manufacturing Overhead + Manufacturing Profit] + Engineering Expense + Tooling
Expense + Facilities Expense



Retail Price Equivalent = Manufacturer Cost × [1 + Dealer Margin]


Page 4


The report lists the following values for overhead, profit, and dealer margin:


Division Overhead = Supplier Overhead = 0.20
(We assume that division and supplier
overheads are equal; only the supplier
overhead is given in the report.)

Manufacturing Overhead = 0.25

Manufacturing Profit = 0.20

Dealer Margin = 0.25

Because the documentation in the OTA report does not provide values for “Assembly Labor,”
“Assembly Overhead,” “Engineering Expense,” “Tooling Expense,” and “Facilities Expense,” cost
multipliers cannot be computed directly from these data. The “Assembly Labor” and “Assembly
Overhead” share of MSRP is 6.5% in Borroni-Bird’s presentation. The engineering, tooling, and
facilities expenses can be taken as the sum of “R&D/Engineering” and “Depreciation and
Amortization” from the ANL methodology, at 12% of the MSRP. In deriving the division cost and
price relationship below, we use the term Retail Price Equivalent (RPE) from the OTA report
instead of MSRP. The RPE can be computed as follows:


RPE
=
{[Division Cost × 1.2 + 0.065 RPE] × 1.45 + 0.12 RPE} × 1.25


=
Division Cost × 2.175 + 0.268 RPE


=
Division Cost × 2.175/(1 – 0.268) = Division Cost × 2.97

Putting ANL and EEA Methodologies on a Common Basis

As it was described in the OTA report, the EEA methodology did not provide enough data to
compute the cost multipliers. We assumed some cost shares to be the same between the EEA,
Borroni-Bird, and ANL methodologies while developing the above relationship between
Division Cost and RPE. The EEA methodology is based on the material and labor costs of a
division of the vehicle manufacturer, with other costs added on. The ANL methodology evaluates
an assembled vehicle, using the vehicle manufacturing cost as the base cost. The ANL
methodology also assigns additional costs to the outsourced components, whereas the treatment
of such components is not clear in the EEA methodology. We have attempted to develop a
common basis for the ANL and EEA methodologies by assigning shares of the final vehicle
price, RPE in the EEA methodology, to individual cost categories similar to those listed in
Table 1. Table 4 presents such a summary for the EEA methodology.

Three cost contributors, “Division Cost,” “Division Overhead,” and “Assembly Labor and
Overhead,” are combined under the “Vehicle Manufacturing” category. Two cost contributors,
“Manufacturing Overhead” and “Engineering, Tooling, and Facilities Expenses,” combine to form
the “Overhead” category. The “Dealer Margin” in the EEA methodology represents a factor applied
to all manufacturer costs and profit. We assumed that this factor represents all costs of selling the
vehicle. Although the profit is computed at the manufacturing level by EEA, we moved the profit to
the bottom of the table to be consistent with prior tables. The cost allocation in Table 4 allows us to
compute the in-house components cost multiplier as follows:


Cost multiplier for in-house components = 100/(33.7 + 6.7 + 6.5) = 2.14
Page 5


To compute the cost multiplier for an outsourced component, one more assumption is necessary. In
the ANL methodology, we assumed that the supplier will bear the costs of “Warranty,” “R&D
Engineering,” and “Depreciation and Amortization.” However, the EEA methodology does not
identify the warranty cost separately. We assumed it to be half of “Manufacturing Overhead” at
5.05%. This, with the earlier assumption related to “Engineering, Tooling, and Facilities Expenses,”
led to the following computation:

Cost multiplier for outsourced components = 100/(33.7 + 6.7 + 6.5 + 5.05 + 12) = 1.56

These multipliers, adapted from our extension of the EEA information on vehicle costs, are very
close to those derived from the ANL and Borroni-Bird methodologies.

Table 4 Contributors to Retail Price Equivalent in EEA Methodology

Cost Category
Cost Contributor

Share of
Relative to Cost of Vehicle
RPE (%)
Manufacturing
Vehicle
Division Cost a 0.72
33.7
Manufacturing
Division Overhead a 0.14
6.7
Assembly Labor and
0.14 6.5
Overhead a
Overhead
Manufacturing Overhead
0.22
10.1
Engineering, Tooling, and
0.26 12.0
Facilities Expenses
Selling Dealer
Margin
0.49
22.9
Sum of Costs

1.97
91.9
Profit Manufacturing
Profit
0.17
8.1
Total Contribution 2.14
100.0
to RPE
a These three cost contributors are scaled to sum to 1 in the third column, as in Table 1.

Comparison of ANL and EEA Methodologies

The information from Tables 1 and 4 is presented in terms of cost categories in Table 5 for easy
comparison. The “Vehicle Manufacturing” cost share is 46.9% in the EEA methodology, compared
with 50% in the ANL methodology. EEA’s RPE share of 22.1% by overhead is lower than the
ANL value of 24%. The cost of selling is 22.9% in the EEA methodology, which is close to the
ANL value of 23.5%. The largest difference is in the RPE share by profit, which is 8.1% in the
EEA methodology, more than three times the ANL value of 2.5%. According to Economic
Indicators: The Motor Vehicle’s Role in the U.S. Economy
(American Automobile Manufacturers
Association 1998), the average net income before taxes for the three domestic manufacturers was
3.9% during 1994-1997. Aside from vehicle sales, this value (3.9%) includes income from spare
parts sales and vehicle financing. Thus, the profit share appears very high in the EEA methodology.
The absolute differences – computed as ANL value minus EEA value – are 3.1% for
component/material cost, 1.9% for overhead, 0.6% for selling, and –5.6% for profit.
Page 6


Table 5 Comparison of Price Allocation by ANL and EEA Methodologies

ANL Methodology
EEA Methodology
Cost Contributor or Category
Share of Cost Contributor or Category
Share of
MSRP (%)
RPE (%)
Vehicle Manufacturing
50.0
Vehicle Manufacturing
46.9
Production Overhead
17.0
Overhead 22.1
Corporate Overhead
7.0
Selling 23.5
Selling 22.9
Sum of Costs
97.5
Sum of Costs
91.9
Profit 2.5
Profit 8.1
MSRP 100.0
RPE
100.0

SUMMARY

An attempt to put three methodologies for automobile cost allocation on a common basis is
presented in this technical memorandum. This comparison was carried out to verify the
reasonableness of the cost multipliers used in ANL’s cost models for electric vehicles and hybrid
electric vehicles. When put into a common format, by means of certain assumptions, the three
approaches yielded the cost multipliers provided in Table 6.

Table 6 Summary of Cost Multipliers Computed on a Common Basis

Multiplier for
ANL
Borroni-Bird
EEA
In-House
Components
2.00 2.05 2.14
Outsourced
Components
1.50 1.56 1.56

ACKNOWLEDGMENT

Funding for the analysis presented here was provided by the Planning and Assessment function
of the Office of Transportation Technologies of the U.S. Department of Energy, managed by Dr.
Philip Patterson. This technical memorandum is produced under U.S. Government contract No.
W-31-109-Eng-38.

REFERENCES

American Automobile Manufacturers Association, 1998, Economic Indicators: The Motor
Vehicle’s Role in the U.S. Economy,
Detroit, Mich.

Borroni-Bird, C., 1996, “Automotive Fuel Cell Requirements,” Proceedings of the 1996
Automotive Technology Development Customers’ Coordination Meeting,
U.S. Department of
Energy, Office of Transportation Technologies, Washington, D.C.

Page 7


Cuenca, R.M., L. L. Gaines, and A. D. Vyas, 2000, Evaluation of Electric Vehicle Production and
Operating Costs,
Argonne National Laboratory Report ANL/ESD-41, Argonne, Ill. (to be
published).

Vyas, A., R. Cuenca, and L. Gaines, 1998, “An Assessment of Electric Vehicle Life Cycle Costs to
Consumers,” Proceedings of the 1998 Total Life Cycle Conference, SAE International Report P-
339, Warrendale, Penn., pp. 161-172.
Page 8

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