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Argonne National Laboratory. or The University of Chicago.COMPARISON OF INDIRECT COST MULTIPLIERS FOR VEHICLE MANUFACTURING INTRODUCTION In the procedure of fabrication and merchandising vehicles. a maker incurs certain costs.

Among these costs are those incurred straight as a portion of fabricating operations and those incurred indirectly in the procedures of fabrication and merchandising. The indirect costs may be productionrelated. such as R & A ; D and technology ; business-related. such as corporate staff wages and pensions ; or retail-sales-related. such as trader support and selling. These indirect costs are recovered by apportioning them to each vehicle.Under a stable.

high-volume production procedure. the allotment of these indirect costs can be approximated as multipliers ( or factors ) applied to the direct cost of fabrication. A maker normally allocates indirect costs to complete vehicles harmonizing to a corporation-specific pricing scheme.

Because the volumes of gross revenues and production vary widely by theoretical account within a corporation. the internal corporate per centum allotment of assorted accounting classs ( such as net income or corporate operating expense ) can change widely among single theoretical accounts. Approaches besides vary across corporations.For our intents.

an mean value is constructed. by agencies of a generic representative method. for vehicle theoretical accounts produced at high volume.

To carry through this. staff at Argonne National Laboratory’s ( ANL’s ) Center for Transportation Research analyzed the conventional vehicle cost construction and developed indirect cost multipliers for rider vehicles. This memoranda summarizes the consequences of an attempt to compare and set on a common footing the cost multipliers used in ANL’s electric and intercrossed electric vehicle cost appraisal processs with those ensuing from two other methodological analysiss.

One of the two compared methodological analysiss 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 study by the Office of Technology Assessment ( OTA ) . Congress of the United States. The cost multipliers are used for scaling the constituent costs to retail monetary values. ANL METHODOLOGY The ANL methodological analysis 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 construction for conventional vehicle fabrication and retailing and assigned portions of the manufacturer’s suggested retail monetary value ( MSRP ) to assorted cost subscribers. Multipliers developed from the ANL methodological analysis are applied to the fabricating cost of an single constituent in order to scale the constituent cost to the retail monetary value. Several cost subscribers are included in the methodological analysis. as summarized in Table 1. Some of the vehicle constituents for electric and intercrossed electric vehicles would be procured from outside providers.This premise is applied to electric thrust constituents. excepting the battery ; the vehicle maker would bring forth the remainder. Therefore.

two cost multipliers. one for the constituents manufactured internally and the other for outsourced constituents. are necessary to gauge the monetary value of electric and intercrossed electric vehicles. Outside providers would incur some of the costs usually borne by the vehicle maker.

In the ANL methodological analysis. we assume that the costs of “Warranty. ” “R & A ; D/Engineering. ” and “Depreciation and Amortization” are borne by the Page 1 providers of outsourced constituents.The outside providers would include these costs in their monetary values. The following two cost multipliers are computed by utilizing “Cost of Manufacture” as the base: Cost multiplier for constituents manufactured internally = 100/50 = 2. 00. Cost multiplier for outsourced constituents = 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 & A ; 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 Net income Net income 0. 05 2. 5 Entire 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 Car: Price/Cost Breakdown.” The charts provided a graphical dislocation of vehicle monetary value. demoing cost subscribers and net income. We used the charts to get at per centum portions of vehicle monetary value by assorted subscribers. Table 2 shows the ensuing allotment.

Page 2 Table 2 Price/Cost Breakdown Based on Borroni-Bird Presentation Cost Category Cost Contributor a Vehicle Manufacturing Fixed Cost Selling Sum of Costs Profit MSRP a Material Cost Assembly Labor and Other Manufacturing a Costss Transportation/Warranty Amortization and Depreciation. Engineering R & A ; D. Pension and Health Care. Ad. and Overhead Price Discounts Dealer Markup Automobile Net income.Relative to Cost of Vehicle Manufacturing 0. 87 0.

13 0. 09 0. 44 Share of MSRP ( % ) 42.

5 6. 5 4. 5 21. 5 0. 10 0.

36 1. 99 0. 06 2. 05 5.

0 17. 5 97. 5 2. 5 100. 0 These two subscribers are scaled to sum to 1 in the 3rd column. as in Table 1. In his presentation. Borroni-Bird did non measure the intervention of in-house or outsourced constituents.

His methodological analysis does non impart itself to easy calculation of cost multipliers comparable with those in the ANL methodological analysis. unless we make a few premises.We have assumed that “Material Cost. ” taken together with “Assembly Labor and Other Fabrication Costss. ” would organize the “Vehicle Manufacturing” base for the in-house constituents. The costs of “Transportation/Warranty.

” “Amortization and Depreciation. ” and “Engineering R & A ; D” would be borne by the providers of outsourced constituents. However. “Amortization and Depreciation” and “Engineering R & A ; 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 class would be borne by the providers of outsourced constituents.Our premises led to the following cost multipliers: Cost multiplier for constituents manufactured internally = 100/ ( 42. 5 + 6. 5 ) = 2. 05.

Cost multiplier for outsourced constituents = 100/ ( 42. 5 + 6. 5 + 4. 5 + 10.

75 ) = 1. 56. These cost multipliers are really similar to those computed with the ANL methodological analysis. Comparison of ANL and Borroni-Bird Methodologies The information from Tables 1 and 2 is shown in footings of cost classs in Table 3. Both methodological analysiss use vehicle fabrication cost as the base and add other costs to it.The portion of MSRP attributable to “Vehicle Manufacturing” is 50 % in the ANL methodological analysis.

compared with 49 % in the Borroni-Bird Methodology. Borroni-Bird combined several cost subscribers under “Fixed Cost. ” These subscribers include ( see Table 2 ) “Amortization and Depreciation. ” “Engineering R & A ; D. ” “Pension and Health Care. ” “Advertising.

” and “Overhead. ” Except for the inclusion of “Advertising. ” “Production Overhead” and “Corporate Overhead” in the ANL methodological analysis can be combined to organize an tantamount class.ANL’s sum of 24 % by production Page 3 and corporate operating expenses is somewhat lower than the sum of 26 % by Borroni-Bird. The ANL class of “Selling.

” which includes “Distribution. ” “Marketing. ” “Dealer Support. ” and “Dealer Discount. ” is broader than that of “Price Discounts” and “Dealer Markup” specified by BorroniBird. and this category’s part is intelligibly somewhat higher in the ANL methodological analysis. The portion of MSRP by “Profit” is the same in both methodological analysiss. 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 Cost Contributor or Category Vehicle Manufacturing Production Overhead Corporate Overhead Selling Sum of Costs Profit MSRP EEA METHODOLOGY The methodological analysis of Energy and Environmental Analysis is summarized in the OTA study OTAETI-638. entitled Advanced Automotive Technology: Visions of a Super-Efficient Family Car. published in September 1995.

The values of some cost subscribers are non listed in the study.Furthermore. depreciation.

amortisation. and tooling disbursals are assumed to be case-specific and therefore must be computed for each instance. In order to do the EEA and ANL methodological analysiss comparable. some premises were necessary.

These premises are described in the drumhead 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 ] Borroni-Bird Methodology Share of Cost Contributor or Category Share of MSRP ( % ) MSRP ( % ) 50. 0 Vehicle Manufacturing 49. 0 17. 0 Fixed Cost 26.

0 7. 0 23. 5 Selling 22. 5 97. 5 Sum of Costs 97. 5 2. 5 Automobile Net income 2.

5 100. 0 MSRP 100. 0 Page 4 The study lists the undermentioned values for operating expense. net income.

and dealer border: Division Overhead = Supplier Overhead = 0. 20 ( We assume that division and provider operating expenses are equal ; merely the provider operating expense is given in the report. ) Manufacturing Overhead = 0.

25 Fabrication Net income = 0.20 Dealer Margin = 0. 25 Because the certification in the OTA study does non supply values for “Assembly Labor. ” “Assembly Overhead. ” “Engineering Expense.

” “Tooling Expense. ” and “Facilities Expense. ” cost multipliers can non be computed straight from these informations.

The “Assembly Labor” and “Assembly Overhead” portion of MSRP is 6. 5 % in Borroni-Bird’s presentation. The technology. tooling. and installations disbursals can be taken as the amount of “R & A ; D/Engineering” and “Depreciation and Amortization” from the ANL methodological analysis.

at 12 % of the MSRP.In deducing the division cost and monetary value relationship below. we use the term Retail Price Equivalent ( RPE ) from the OTA study alternatively 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 Puting ANL and EEA Methodologies on a Common Basis As it was described in the OTA study. the EEA methodological analysis did non supply plenty informations to calculate the cost multipliers.We assumed some cost portions to be the same between the EEA. Borroni-Bird.

and ANL methodological analysiss while developing the above relationship between Division Cost and RPE. The EEA methodological analysis is based on the stuff and labour costs of a division of the vehicle maker. with other costs added on.

The ANL methodological analysis evaluates an assembled vehicle. utilizing the vehicle fabrication cost as the base cost. The ANL methodological analysis besides assigns extra costs to the outsourced constituents. whereas the intervention of such constituents is non clear in the EEA methodological analysis.We have attempted to develop a common footing for the ANL and EEA methodological analysiss by delegating portions of the concluding vehicle monetary value. RPE in the EEA methodological analysis. to single cost classs similar to those listed in Table 1.

Table 4 nowadayss such a sum-up for the EEA methodological analysis. Three cost subscribers. “Division Cost. ” “Division Overhead. ” and “Assembly Labor and Overhead. ” are combined under the “Vehicle Manufacturing” class. Two cost subscribers. “Manufacturing Overhead” and “Engineering.

Tooling. and Facilities Expenses. ” combine to organize the “Overhead” class.The “Dealer Margin” in the EEA methodological analysis represents a factor applied to all maker costs and net income. We assumed that this factor represents all costs of selling the vehicle. Although the net income is computed at the fabricating degree by EEA. we moved the net income to the underside of the tabular array to be consistent with anterior tabular arraies. The cost allotment in Table 4 allows us to calculate the in-house constituents cost multiplier as follows: Cost multiplier for in-house constituents = 100/ ( 33.

7 + 6. 7 + 6. 5 ) = 2. 14 Page 5 To calculate the cost multiplier for an outsourced constituent.

one more premise is necessary.In the ANL methodological analysis. we assumed that the provider will bear the costs of “Warranty. ” “R & A ; D Engineering.

” and “Depreciation and Amortization. ” However. the EEA methodological analysis does non place the guarantee cost individually. We assumed it to be half of “Manufacturing Overhead” at 5. 05 % . This.

with the earlier premise related to “Engineering. Tooling. and Facilities Expenses.

” led to the undermentioned calculation: Cost multiplier for outsourced constituents = 100/ ( 33. 7 + 6. 7 + 6. 5 + 5.

05 + 12 ) = 1. 56.These multipliers.

adapted from our extension of theE EA information on vehicle costs. are really near to those derived from the ANL and Borroni-Bird methodological analysiss. Table 4 Contributors to Retail Price Equivalent in EEA Methodology Cost Category Cost Contributor a Vehicle Manufacturing Overhead Selling Sum of Costs Profit Manufacturing Profit Total Contribution to RPE a Division Cost a Division Overhead Assembly Labor and a Overhead Manufacturing Overhead Engineering. Tooling. and Facilities Expenses Dealer Margin Relative to Cost of Vehicle Manufacturing 0.

72 0. 14 0. 14 0. 22 0.

26 0. 49 1. 97 0.

17 2. 14 Share of RPE ( % ) 33. 7 6. 7 6.

5 10. 1 12. 0 22.9 91.

9 8. 1 100. 0 These three cost subscribers are scaled to sum to 1 in the 3rd column. as in Table 1. Comparison of ANL and EEA Methodologies The information from Tables 1 and 4 is presented in footings of cost classs in Table 5 for easy comparing.

The “Vehicle Manufacturing” cost portion is 46. 9 % in the EEA methodological analysis. compared with 50 % in the ANL methodological analysis. EEA’s RPE portion of 22.

1 % by operating expense is lower than the ANL value of 24 % . The cost of selling is 22. 9 % in the EEA methodological analysis. which is near to the ANL value of 23. 5 % . The largest difference is in the RPE portion by net income.

which is 8.1 % in the EEA methodological analysis. more than three times the ANL value of 2. 5 % .

Harmonizing to Economic Indexs: The Motor Vehicle’s Role in the U. S. Economy ( American Automobile Manufacturers Association 1998 ) . the mean net income before revenue enhancements for the three domestic makers was 3. 9 % during 1994-1997. Aside from vehicle gross revenues. this value ( 3.

9 % ) includes income from trim parts gross revenues and vehicle funding. Thus. the net income portion appears really high in the EEA methodological analysis.

The absolute differences – computed as ANL value subtraction EEA value – are 3. 1 % for component/material cost. 1.9 % for operating expense. 0. 6 % for selling. and –5. 6 % for net income.

Page 6 Table 5 Comparison of Price Allocation by ANL and EEA Methodologies ANL Methodology Cost Contributor or Category Vehicle Manufacturing Production Overhead Corporate Overhead Selling Sum of Costs Profit MSRP SUMMARY An effort to set three methodological analysiss for car cost allotment on a common footing is presented in this proficient memoranda. This comparing was carried out to verify the rationality of the cost multipliers used in ANL’s cost theoretical accounts for electric vehicles and intercrossed electric vehicles.When put into a common format. by agencies of certain premises. the three attacks yielded the cost multipliers provided in Table 6. Table 6 Summary of Cost Multipliers Computed on a Common Basis Multiplier for In-House Components Outsourced Components ACKNOWLEDGMENT Funding for the analysis presented here was provided by the Planning and Assessment map of the Office of Transportation Technologies of the U. S. Department of Energy.

managed by Dr. Philip Patterson. This proficient memoranda is produced under U. S. Government contract No.

W-31-109-Eng-38.REFERENCES American Automobile Manufacturers Association. 1998. Economic Indexs: 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. ANL 2.

00 1. 50 Borroni-Bird 2. 05 1. 56 EEA 2. 14 1. 56 EEA Methodology Share of Cost Contributor or Category MSRP ( % ) 50. 0 Vehicle Manufacturing 17.

0 Overhead 7. 0 23. 5 Selling 97. 5 Sum of Costs 2. 5 Net income 100. 0 RPE Share of RPE ( % ) 46. 9 22. 1 22.

9 91. 9 8. 1 100.

0 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 P339.

Warrendale. Penn. . pp. 161-172.