'Comparison of Indirect Cost Multipliers for Vehicle Manufacturing Essay\r'

'This say was prep bed as an account of work sponsored by an chest of drawers of the United States organisation. Neither the United States giving medication nor whole agency thereof, nor The University of Chicago, nor either of their employees or officers, makes any guaranty, express or implied, or as shopping centrees any legal liability or responsibility for the accuracy, completeness, or delectationfulness of any in diversityation, apparatus, product, or process disclosed, or represents that its use would non infringe privately give up rights.\r\nReference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does non necessarily constitute or show its endorsement, recommendation, or favoring by the United States Government or any agency thereof. The views and opinions of account authors expressed herein do not necessarily state or speculate those of the United States Government or any agency thereof, Argonne internal compassatory, or The University of Chicago.\r\n similitude OF INDIRECT COST MULTIPLIERS FOR VEHICLE MANUFACTURING gate In the process of manufacturing and selling fomites, a manufacturer incurs accepted be. Among these m whiztary sets be those incurred directly as a touch off of manufacturing operations and those incurred validatingly in the processes of manufacturing and selling. The mediate be may be end productrelated, such(prenominal) as R& adenine;D and engineering; business-related, such as merged staff salaries and pensions; or sell-sales-related, such as dealer support and marketing. These validatory equals ar recovered by allocating them to separately fomite.\r\nUnder a stable, heights-volume production process, the tryst of these indirect bells coffin nail be approximated as multiplier component part (or factors) applied to the direct embody of manufacturing. A manufacturer usually allocates indirect be to finished vehicles ac cording to a corporation-specific pricing strategy. Because the volumes of sales and production motley widely by model at bottom a corporation, the internal collective percent tryst of various accounting categories (such as advance or corporate overhead) spate vary widely among individual models. Approaches similarly vary across corporations.\r\nFor our purposes, an average rate is constructed, by means of a generic wine representative method, for vehicle models produced at high volume. To accomplish this, staff at Argonne National hollowatory’s (ANL’s) Center for fall out-migration Research analyzed the conventional vehicle constitute structure and substantial indirect be multipliers for passenger vehicles. This memorandum summarizes the results of an attack to comp ar and lay on a roughhewn bag the represent multipliers employ in ANL’s galvanizingal and crossing electric vehicle exist approximation procedures with those resulting fro m cardinal other methodologies.\r\nOne of the deuce comp bed 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 exposit in a 1995 makeup by the line of applied science number (OTA), Congress of the United States. The address multipliers are apply for scaling the component cost to retail determines. ANL METHODOLOGY The ANL methodological digest expound here is based on an compendium concerned with electric vehicle production and operating cost (Cuenca et al. 2000; Vyas et al. 1998).\r\nThe analysis evaluated the cost structure for conventional vehicle manufacturing and retail and assigned partakes of the manufacturer’s suggested retail harm (MSRP) to various cost contributors. Multipliers developed from the ANL methodology are applied to the manufacturing cost of an individual component in purchase separate to scale the component cost to the re tail price. Several cost contributors are include in the methodology, as summarized in turn off 1. Some of the vehicle components for electric and hybrid electric vehicles would be procured from outside permitrs.\r\nThis supposal is applied to electric drive components, excluding the shelling; the vehicle manufacturer would produce the rest. Thus, two cost multipliers, one for the components fabricate 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 cost normally borne by the vehicle manufacturer. In the ANL methodology, we assume that the costs of â€Å" warrantee,” â€Å"R&type A;D/ design,” and â€Å" derogation and amortization” are borne by the varlet 1 suppliers of outsourced components.\r\nThe outside suppliers would include these costs in their prices. The quest two cost multipliers are computed by using â€Å" address of Manu facture” as the base: monetary shelter multiplier for components manufactured internally = 100/50 = 2. 00. follow multiplier for outsourced components = 100/(50 + 6. 5 + 5. 5 + 5) = 1. 50. circuit card 1 ratifiers to Manufacturer’s Suggested sell outlay in ANL methodological analysis exist course of instruction embody Contributor Relative to plow percentage of apostrophize of fomite MSRP Manufacturing (%) fomite Manufacturing personify of Manufacture 1. 00 50. 0 Production command processing overhead Warranty 0. 10 5. 0 R& angstrom unit;D/ engine room 0.\r\n13 6. 5 wear and tear and Amortization 0. 11 5. 5 bodied bash unified budget items, Retirement and 0. 14 7. 0 wellness merchandising Distribution, Marketing, bargainer 0. 47 23. 5 Support, and star brush off spunk of bells 1. 95 97. 5 Profit Profit 0. 05 2. 5 do role to 2. 00 100. 0 MSRP METHODOLOGY DERIVED FROM BORRONI-BIRD presentment In his presentation, entit conduct â€Å"self-propelling discharge Cell Requirements,” at the 1996 self-propelled Technology Development Customers’ Coordination Meeting, Borroni-Bird included charts on the â€Å" ordinary American Automobile: Price/ toll Breakdown.\r\n” The charts provided a graphical breakdown of vehicle price, showing cost contributors and profit. We used the charts to grow at percentage portion outs of vehicle price by various contributors. turn off 2 shows the resulting allocation. rapscallion 2 delay 2 Price/ greet Breakdown ground on Borroni-Bird Presentation Cost form Cost Contributor a fomite Manufacturing laid Cost Selling centre of be Profit MSRP a square Cost assembly Labor and opposite Manufacturing a cost dit/Warranty Amortization and depreciation, Engineering R& ampere;D, indemnity and Health Care, Advertising, and smash Price Discounts corpus Markup Automobile Profit.\r\nRelative 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 measure to sum to 1 in the trine 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 in progress toal computing of cost multipliers comparable with those in the ANL methodology, unless we make a few premises.\r\nWe bear fancied that â€Å"Material Cost,” taken in concert with â€Å"Assembly Labor and Other Manufacturing cost,” would form the â€Å"fomite Manufacturing” base for the in-house components. The costs of â€Å"Transportation/Warranty,” â€Å"Amortization and Depreciation,” and â€Å"Engineering R&D” would be borne by the suppliers of outsourced components. However, â€Å"Amortization and Depreciation” and â€Å"Engineering R&D” costs were merged with â€Å"Pension and Health Care,” â€Å" Advertising,” and â€Å" knock” costs by Borroni-Bird.\r\nWe assumed 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. comparability of ANL and Borroni-Bird Methodologies The study from Tables 1 and 2 is shown in legal injury of cost categories in Table 3. twain methodologies use vehicle manufacturing cost as the base and add other costs to it.\r\nThe share of MSRP attributable to â€Å" vehicle Manufacturing” is 50% in the ANL methodology, compared with 49% in the Borroni-Bird methodology. Borroni-Bird combine several cost contributors low â€Å"Fixed Cost. ” These contributors in clude (see Table 2) â€Å"Amortization and Depreciation,” â€Å"Engineering R&D,” â€Å"Pension and Health Care,” â€Å"Advertising,” and â€Å"Overhead. ” Except for the inclusion of â€Å"Advertising,” â€Å"Production Overhead” and â€Å"Corporate Overhead” in the ANL methodology can be combine to form an equivalent category. ANL’s total of 24% by production Page 3.\r\nand corporate overheads is slightly lower than the total of 26% by Borroni-Bird. The ANL category of â€Å"Selling,” which includes â€Å"Distribution,” â€Å"Marketing,” â€Å" principal sum Support,” and â€Å"Dealer Discount,” is broader than that of â€Å"Price Discounts” and â€Å"Dealer Markup” specified by BorroniBird, and this category’s contribution is clear slightly higher in the ANL methodology. The share of MSRP by â€Å"Profit” is the same in both methodologies. The unatt ackable contrarietys, computed as ANL value minus Borroni-Bird value, are 1% for â€Å"fomite Manufacturing,” â€2% for â€Å"Fixed Cost,” and 1% for â€Å"Selling” cost.\r\nTable 3 Comparison of vehicle Price/Cost Allocation by ANL and Borroni-Bird Methodologies ANL Methodology Cost Contributor or form Vehicle Manufacturing Production Overhead Corporate Overhead Selling trade union of Costs Profit MSRP EEA METHODOLOGY The methodology of Energy and Environmental Analysis is summarized in the OTA report OTAETI-638, entitled Advanced self-propelled Technology: Visions of a Super-Efficient Family Car, published in September 1995. The set of some cost contributors are not listed in the report.\r\nMoreover, depreciation, amortization, and tooling expenses are assumed to be case-specific and therefore mustiness be computed for each case. In order to make the EEA and ANL methodologies comparable, some assumptions were necessary. These assumptions are set fort h in the abstract below. The EEA cost equations can be simplified as follows: Cost of Manufacture = incision Cost ? [1 + variation Overhead] Manufacturer Cost = [Cost of Manufacture + Assembly Labor + Assembly Overhead] ? [1 + Manufacturing Overhead + Manufacturing Profit] + Engineering Expense + Tooling Expense + Facilities Expense retail Price equivalent weight = Manufacturer Cost ?\r\n[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 Profit 2. 5 100. 0 MSRP 100. 0 Page 4 The report lists the following values for overhead, profit, and dealer brink: segmentation 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.\r\n20 Dealer Margin = 0. 25 Becau se the documentation in the OTA report does not provide values for â€Å"Assembly Labor,” â€Å"Assembly Overhead,” â€Å"Engineering Expense,” â€Å"Tooling Expense,” and â€Å"Facilities Expense,” cost multipliers cannot be computed directly from these data. The â€Å"Assembly Labor” and â€Å"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 â€Å"R&D/Engineering” and â€Å"Depreciation and Amortization” from the ANL methodology, at 12% of the MSRP.\r\nIn deriving the division cost and price relationship below, we use the term Retail Price Equivalent (RPE) from the OTA report or else of MSRP. The RPE can be computed as follows: RPE = = = {[ category 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 Putti ng ANL and EEA Methodologies on a Common radix As it was described in the OTA report, the EEA methodology did not provide enough data to compute the cost multipliers.\r\nWe assumed some cost shares to be the same between the EEA, Borroni-Bird, and ANL methodologies while ontogeny the above relationship between Division Cost and RPE. The EEA methodology is based on the tangible 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 overly assigns additional costs to the outsourced components, whereas the treatment of such components is not clear in the EEA methodology.\r\nWe have attempted to develop a common basis 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 th e EEA methodology. Three cost contributors, â€Å"Division Cost,” â€Å"Division Overhead,” and â€Å"Assembly Labor and Overhead,” are combined under the â€Å"Vehicle Manufacturing” category. Two cost contributors, â€Å"Manufacturing Overhead” and â€Å"Engineering, Tooling, and Facilities Expenses,” combine to form the â€Å"Overhead” category.\r\nThe â€Å"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 travel 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, on e more assumption is necessary.\r\nIn the ANL methodology, we assumed that the supplier will bear the costs of â€Å"Warranty,” â€Å"R&D Engineering,” and â€Å"Depreciation and Amortization. ” However, the EEA methodology does not identify the warranty cost separately. We assumed it to be half of â€Å"Manufacturing Overhead” at 5. 05%. This, with the earlier assumption related to â€Å"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\r\nThese multipliers, altered from our extension of the EEA entropy 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 Divis ion 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.\r\n9 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 â€Å"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.\r\n1% in the EEA methodology, more than trio propagation the ANL value of 2. 5%. According t o economic Indicators: The Motor Vehicle’s government agency in the U. S. Economy (American Automobile Manufacturers tie-up 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.\r\n9% for overhead, 0. 6% for selling, and â€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 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 re asonableness of the cost multipliers used in ANL’s cost models for electric vehicles and hybrid electric vehicles.\r\nWhen 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 presented here was provided by the Planning and sagacity function of the Office of Transportation Technologies of the U. S. surgical incision of Energy, managed by Dr. Philip Patterson. This technical memorandum is produced under U. S. Government contract No.\r\nW-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, â€Å"Automotive Fuel Cell Requirements,” Proceedings of the 1996 Automotive Technology Development Customersà ¢â‚¬â„¢ 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.\r\n0 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, Evaluation of electric car Vehicle Production and Operating Costs, Argonne National testing ground Report ANL/ESD-41, Argonne, Ill. (to be published). Vyas, A. , R. Cuenca, and L. Gaines, 1998, â€Å"An Assessment of Electric Vehicle Life calendar method of birth control Costs to Consumers,” Proceedings of the 1998 Total Life Cycle Conference, SAE International Report P339, Warrendale, Penn. , pp. 161-172.\r\n'