Cost for next unit off the line: 1/6 of the sticker?

[nater]

A friend of mine claimed to me that for GM vehicles, the cost to produce the next unit of a given model is 1/6 of the sticker price. Put simply, if a Chevy costs $36,000 MSRP, if GM wants to build another identical one, the cost per unit off the line is $6000. This factor doesn't include R&D to create the given model, profit, warranty, distribution, etc, it's merely parts+ materials+labor to produce. I thought long and hard about this, and it seems like he might be right. If you've ever watched a car assembly line, these guys move fast. Also, GM buys everything in bulk. Paint is by the vat, steel by the train car (or shipload sometimes) and tires by the shipping container.

That being said, can GM build a Chevy Volt for $7000? Can they even get close? Or better yet, can Toyota build a Prius for $4000? Toyota originally stated that their R&D costs were immense for GEN1 Prius, and they built them for far longer than they wanted to in order to break even. For Gen2 Prius, small tweaks from the old one were all that was needed, and the profit started coming in.

So. What's the raw cost for a Volt? Will it ever get down to 1/6? Or is this number bunk?

Nate

[Henry_FL]

Your friend is making it all up

[DonC]

I can see where he might get that but it would be more that THE FIRST VEHICLE off the line cost a fortune and the next vehicle cost a tiny fraction of that. This is what you get if you apportion all the development costs to the first vehicle. But these costs should and are apportioned to the expected run of the vehicle. In this case the number wouldn't be 1/6th. The first vehicle would cost a billion dollars.

He might also be talking about apportioning the costs of setting up the production line. Again the number would be more than 1/6th.

[nater]

To clarify, this is the raw cost, including NONE of the apportioned cost, like R&D, tool and die, line setup, etc. Basically, the cost to get "one more" after all the other costs are spent. In other words, the "tiny fraction" that you mention, is purportedly the 1/6th.

Seems plausible, I'd love to hear from someone who really knows...

Nate

[saghost]

Lots of generalities, nothing Volt specific. If anyone outside GM knows GM's costs for the Volt, they are almost certainly under an NDA. A couple thoughts...

In Aerospace, it isn't uncommon to have a burdened labor rate that is 5-6 times the unburdened rate, which makes this sound somewhat plausible (I don't know anything about automotive accounting.)

The big player here is learning curve... It isn't uncommon to have a 90% curve or even a little lower. That is, if it costs 1000 labor hours to build the first widget, the second costs 900 hours, the fourth 810 hours, the 8th 729 hours, and so on. GM has built close to 30,000 Volts unless they skipped some VIN numbers. With more than 14 cycles on a 90% curve, they'd be approaching 20% of the cost of the very first Volt built (which undoubtedly cost far more than the current sale price.) Of course, every time they shut down production they lose a little on learning curve...

[Neromanceres]

Well I used to work in automotive. I could say that just the raw material cost of a car could be in the $6K to $7K range. But this wouldn't include anything else (not even assembly or supplier costs). The Volt I would imagine would be higher due to the the high raw battery cost.

[Steverino]

Let's say the raw material are in that range. Raw materials don't fabricate themselves, nor do part self-assemble. Nor do they get designed, tested, etc. So it's a bit like saying the cost of a house is the cost of a pile of lumber, wire, flooring, wallboard, etc, dumped in your lot. That's not really a house

[Dithermaster]

Using language like "the next unit" adds confusion to this. The second one costs exactly the same as the first one if they are using the same parts.

Part cost is only a fraction of where your MSRP dollar goes of course. So what if the parts only cost $6,000 (or $20,000). Someone has to keep the lights on, design and build the manufacturing line, pay the engineers, assemblers, accountants, and marketing folks.

[cnicholson]

This concept is a common one in any business. It the ECONOMIC marginal cost of production. The ACCOUNTING costs (even at the margin) will include many allocations for things like warranty expense, pension expense, amortization of prior investments in R&D, etc. But the economic costs cover just the cash expenses of making 1001 units instead of 1000 units. This would include the direct cash cost of the extra inputs for the marginal unit: materials, labor, power for the plant, potential royalty payments to third parties, etc.

The average ACCOUNTING gross margin on cars from GM is about 15% (cost = 85%). This is before non-manufacturing costs.

The OP here is asking about "marginal margin" on an economic basis.

My guess for a regular, high-volume ICE car with a MSRP of $40K would be that margin economic production costs would be about 50% or about $20K. For the Volt, I would guess it is MUCH MUCH higher. Perhaps 80%, or $32K. These are just guesses.

No way that you could buy all the pieces and assemble the volt for $6K.

You have to also remember that GM is not fully vertically integrated. It is not as if they buy iron ore, raw silicon, chemicals and make cars. Much (most?) of the value is in the form of parts and subassemblies that, from GM's perspective, reflect a fully-loaded cost (including profit margin) for the manufacturer....

[Red Volt]

The problem is that no one builds a plant to build just one. They figure in the cost of overhead, labor, etc, and how many units they will make. There is some economy of scale, but the idea of the next one is almost like saying the cost the make one last car after the line shutdown, and all costs are paid. Trust me, no one invests in a factory without a long term production goal.