erally do not include warranty, profit, transportation, and retailing costs, and may not include overhead or research and development. Other estimates are based on the prices that original equipment manufacturers (OEMs) would pay a Tier 1 supplier for a fully manufactured component.3 These estimates include the supplier’s overhead, profit, and R&D costs, but not costs incurred by the OEM. RPEs attempt to estimate the fully marked-up cost to the ultimate vehicle purchaser. A key issue for cost estimates based on Tier 1 supplier costs is the appropriate markup to RPE. This will depend on the degree to which the part requires engineering and design changes to be integrated into the vehicle, and other factors.

  • Allocation of overhead costs. Specific changes in vehicle technology and design may affect some of an OEM’s costs of doing business and not others. A reduction in engine friction, for example, might not affect advertising budgets or transportation costs. To date there is a very limited understanding of how to determine which costs of doing business are affected by each individual technology and how to develop technology-specific markups (e.g., Rogozhin et al., 2009). In theory, this approach has the potential to yield the most accurate results. However, in practice, unambiguous attribution of costs to specific vehicle components is difficult. For example, despite extensive reliability testing, it is not possible to predict with certainty what impact a technology or design change will have on warranty costs. Furthermore, there are significant cost components that cannot logically be allocated to any individual component. Among these are the maintenance of a dealer network and advertising. Yet, these costs must be paid. The RPE method assumes that such costs should be allocated in proportion to the component’s cost and that overall overhead costs will increase in proportion to total vehicle cost. This will not necessarily produce the most accurate estimate for each individual item but is consistent with the goal of estimating long-run average costs.

COMPONENTS OF COST

Although different studies describe and group the components of the retail price equivalent (long-run average cost) in different ways, there are four fundamental components: (1) the variable costs of manufacturing components, (2) fixed costs of manufacturing components, (3) variable costs of vehicle assembly, and (4) fixed costs of vehicle assembly and sale. The distinction between variable and fixed costs is not a sharp one, because many “fixed” costs scale to some extent with production volume. In fact, the degree to which fixed or overhead costs scale with variable costs is a key area of uncertainty.

Although many components are manufactured in-house by OEMs, it is useful to distinguish between component and vehicle assembly costs, because many manufacturers purchase 50 percent or more of a vehicle’s components from suppliers. Transaction prices and price estimates from Tier 1 and Tier 2 suppliers are a major source of information on the costs of fuel economy technologies.

Variable manufacturing costs of components include materials, labor, and direct labor burden (Table 3.1). Variable manufacturing costs are sometimes referred to as direct manufacturing costs, although when this term is used it typically includes the depreciation and amortization of manufacturing equipment. Fixed costs of component manufacturing include tooling and facilities depreciation and amortization associated with capital investments, manufacturing overhead (e.g., R&D, engineering, warranty, etc.), and profit (or return to capital). Unfortunately, terminology frequently differs from one study to another. Total manufacturing costs (variable plus fixed) are equivalent to the price that a Tier 1 supplier would charge an OEM for a finished component, ready for installation.

OEM or assembly costs include the variable costs of materials, labor, and direct labor burden for vehicle assem-

TABLE 3.1 Components of Vehicle Retail Price Equivalent (Long-Run Average Cost)

Component Manufacturing (Subassembly)

Variable component manufacturing costs

Materials

Labor

Direct labor burden

Fixed component manufacturing costs

Tooling and facilities depreciation and amortization

R&D

Engineering

Warranty

Other overhead

Profit

Vehicle Assembly and Marketing

Variable costs

Assembly materials

Assembly labor

Direct labor burden

Fixed costs

Tooling and facilities depreciation and amortization

Warranty

R&D

Engineering

Warranty

Other overhead

Transportation

Marketing and advertising

Dealer costs and profit

Original equipment manufacturer profit

3

Tier 1 suppliers contract directly with OEMs, whereas Tier 2 suppliers contract with Tier 1 suppliers.



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