Comparison of Indirect Cost Multipliers for Vehicle Manufacturing Essay Example for Free

Comparison of Indirect approach Multipliers for fomite Manufacturing EssayDisclaimer This authorship was prep atomic number 18d as an account of work sponsored by an delegacy of the joined States Government. Neither the unify States Government nor whatsoever 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 in engineeration, 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, producer, or otherwise does not ineluctably 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 t he 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 shaper incurs true constitutes. Among these embodys ar those incurred now as a part of manufacturing operations and those incurred confirmatoryly in the processes of manufacturing and selling. The indirect follows may be output signalrelated, such as RD and engineering business-related, such as corporate staff salaries and pensions or retail-gross revenue-related, such as dealer support and marketing. These indirect be are recovered by allocating them to each vehicle.Under a stable, high-volume production process, the allocation of these indirect be can be approximated as multipliers (or components) applied to the direct court of manufacturing. A manufacturer usually allocates indirect follows to finished vehicles according to a corporation-specific pricing strategy. Because the volumes of sales and production vary astray by model within a corporation, the internal corporate part 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 grade is constructed, by means of a generic wine representative method, for vehicle models produced at high volume. To accomplish this, staff at Argonne National Laboratorys (ANLs) Center for Transportation Research analyzed the conventional vehicle price structure and developed indirect cost multipliers for passenger vehicles. This memorandum summarizes the results of an effort to compare and put on a common tooshie the cost multipliers used in ANLs electric and mark electric vehicle cost assessment procedures with those resulting from two other methodologies.One of the two compared methodologies is derived from a 1996 presentati on by Dr. Chris Borroni-Bird of Chrysler Corporation, the other is by brawniness and Environmental Analysis, Inc. (EEA), as described in a 1995 report by the Office of engineering judgment (OTA), Congress of the United States. The cost multipliers are used for scaling the component costs to retail impairments. ANL methodology The ANL methodology described here is sternd 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 manufacturers 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 slacken 1. Some of the vehicle components for electric and h ybrid 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 cast 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, RD/Engineering, and Depreciation and Amortization are borne by the rascal 1 suppliers of outsourced components.The outside suppliers would include these costs in their prices. The pursual two cost multipliers are computed by using cost of cause as the base embody 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 Manufacturers Sug gested retail equipment casualty in ANL Methodology Cost course of instruction Cost Contributor relational to Share of Cost of vehicle MSRP Manufacturing (%) fomite Manufacturing Cost of Manufacture 1. 00 50. 0 take belt Warranty 0. 10 5. 0 RD/Engineering 0.13 6. 5 Depreciation and Amortization 0. 11 5. 5 incarnate Overhead Corporate Overhead, Retirement and 0. 14 7. 0 wellness marketing Distribution, Marketing, principal 0. 47 23. 5 Support, and Dealer terminate pairing 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 lifelike breakdown of vehicle price, showing cost contributors and profit. We used the charts to arrive at percentage sh ares 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 a Vehicle Manufacturing Fixed Cost Selling Sum of Costs Profit MSRP a Material Cost fictionalization Labor and Other Manufacturing a Costs Transportation/Warranty Amortization and Depreciation, Engineering RD, Pension and Health Care, Advertising, and Overhead Price Discounts Dealer Markup Automobile Profit.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 contributors are scaled to sum to 1 in the tercet 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 as sumptions.We create faux that Material Cost, interpreted together with gathering 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 RD would be borne by the suppliers of outsourced components. However, Amortization and Depreciation and Engineering RD costs were merged with Pension and Health Care, Advertising, and Overhead costs by Borroni-Bird. We simulated that half of the costs down the stairs 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 instruction fr om 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 feature several cost contributors under Fixed Cost. These contributors include (see Table 2) Amortization and Depreciation, Engineering RD, Pension and Health Care, Advertising, and Overhead. Except for the cellular inclusion of Advertising, Production Overhead and Corporate Overhead in the ANL methodology can be combined to form an equivalent category.ANLs total of 24% by production Page 3 and corporate overheads is somewhat 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 specify by BorroniBird, and this categorys cont ribution 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 Cost Contributor or Category Vehicle Manufacturing Production Overhead Corporate Overhead Selling Sum of Costs Profit MSRP EEA METHODOLOGY The methodology of nix and Environmental Analysis is summarized in the OTA report OTAETI-638, entitled Advanced Automotive Technology Visions of a Super-Efficient Family Car, print 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 as sumptions 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 alike = Manufacturer Cost ?1 + Dealer border 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 Profit 2. 5 100. 0 MSRP 100. 0 Page 4 The report lists the following values for overhead, profit, and dealer margin Division Overhead = Supplier Overhead = 0. 20 (We assume that region and supplier overheads are equal only the supplier overhead is given in the report. ) Manufacturing Overhead = 0. 25 Manufacturing Profit = 0.20 Dealer Marg in = 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 info. The Assembly Labor and Assembly Overhead share of MSRP is 6. 5% in Borroni-Birds presentation. The engineering, tooling, and facilities expenses can be taken as the sum of RD/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 rather 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 c ompute the cost multipliers.We assumed some cost shares to be the same between the EEA, Borroni-Bird, and ANL methodologies while ontogenesis the above relationship between Division Cost and RPE. The EEA methodology is based on the material and wear upon 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 gather in in the EEA methodology.We have attempted to develop a common tail for the ANL and EEA methodologies by assigning shares of the net 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 Vehic le 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 privy 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, RD 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 theE EA 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 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 trio 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. EEAs 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 Vehicles 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 t he 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 Cost Contributor or Category Vehicle Manufacturing Production Overhead Corporate Overhead Selling Sum of Costs Profit MSRP compendium 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 ANLs 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 In-House Components Outsourced Components ACKNOWLEDGMENT Funding for the analysis p resented here was provided by the Planning and sound judgment 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 exhort No.W-31-109-Eng-38.REFERENCES American Automobile Manufacturers Association, 1998, Economic Indicators The Motor Vehicles 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 Profit 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, Evaluatio n 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 rack Costs to Consumers, Proceedings of the 1998 Total Life Cycle Conference, SAE International Report P339, Warrendale, Penn. , pp. 161-172.