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METHODOLOGY TO DERIVE RPE FROM COSTS

The RPE evaluation uses an approach followed by industry that includes the variable cost for each unit of the component or technology, and the allocation of the fixed costs associated with facilities, tooling, engineering, and launch expenses.

The methodology has been used widely by regulatory agencies and is described in a report to the Environmental Protection Agency. it has been adopted here with modifications suggested by recent manufacturer submissions to the U.S. Department of Transportation.

The methodology estimates both the amortization (based on the expected rate of return) of the investment cost of R&D engineering, tooling, production, and launch, and the labor, material, and plant operating costs, based on expected sales.

Cost

If actual sales volume exceeds expected volumes, the manufacturer records a higher profit margin, but a lower volume can result in a loss. These excess profits and losses are balanced over a range of models which exceed, or are below, sales targets for a given manufacturer. The expected rate of return is set at 15 percent (real), which is higher than the normal rate of about 10 percent, and represents the risk-adjusted oligopoly rate of return.

The methodology uses a three-tier structure of cost allocation. A specific component, such as a new piston or a turbocharger, is first manufactured by a supplier company, or by a division of the manufacturer that is an in-house supplier (e.g., Delco supplies GM with electrical components).

Conclusion

The supplier part “cost” to the manufacturer has both variable and fixed components–the variable cost is associated with materials, direct labor, and manufacturing overhead, and the pretax profit is calculated as a percentage of variable costs.

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