Thanks, ECONOMIC marginal cost of production is a good way to express what I'm asking about. Essentially, my thought is, does it matter if the Volt has a much higher ECONOMIC marginal cost of production than an ICE car? Or, as long as profit is there, is it okay if the car has $20,000 worth of parts instead of $6000 as long as the margin is on the top end?

Nate


Quote Originally Posted by cnicholson View Post
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....