It is quite difficult to determine the actual cost of manufacturing a vehicle. Mainly because of hidden administration, service related indirect costs. Therefore the manufacturing cost of a vehicle is actually just an estimate.
Also, both fixed and variable costs keep changing depending on many factors in the operating environment. The factors include changing fuel prices.
Final Cost Overview
Also, the final cost depends on how long the car has been in the market. Has the initial cost of research, development, design, and marketing of the car been recovered or not?
In a bid to cut down costs, some product manufacturers usually choose to outsource some manufacturing functions by importing some of the car parts. They therefore only focus on designing the product, shipping it, assembling it, storage, marketing, branding and advertising their models.
This is because it is sometimes cheaper to outsource some functions of manufacturing. But this decision may come with an extra cost of shipping the product.
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A Vehicle’s Manufacturing Process
Before establishing an estimate of how much a car may have really cost to manufacture, it is important to consider at all the processes involved in its manufacture. The process depends on whether the car is an old model being manufactured or a new model being launched.
Manufacturing Costs of New Vehicles
To keep abreast with market trends and environmental laws and other state regulations, new inventions and innovations have to be keep being developed. This is especially when there is a concern about your brand of vehicle, for example, pollution.
Whereas it is much easier and cheaper to produce an old brand of a vehicle, but new innovations by your competition can totally eliminate your old brands from the market.
It costs millions of dollars to launch a new model of vehicle. This is because most times, only a few vehicles are manufactured initially to test the market.
But eventually, most models of vehicles usually get mass produced, when tens of thousands are manufactured, lowering their production costs per unit tremendously.
Not unless it is a special brand manufactured for an exclusive kind of clientele, of which the price may remain at a premium.
Manufacturing a new vehicle model usually begins with a few years of research, design, and development.
There is a long process between when the first design is proposed until the final design is approved for development and a sample prototype manufactured.
The cost of manufacturing a new model may include redesigning the factories and retraining workers or hiring new workers. It may also require the purchase of new plants.
The prototypes have to be tested before being approved for production. Then new suppliers have to be sought. Then it has to be branded, manufactured and released into the market.
Also when a car is a new model, it is difficult and a risk to outsource any of its functions. Outsourcing happens later.
The advantage of manufacturing new car models is that it may have new unique features and therefore become a popular brand within a very short time.
Consumers appreciate new inventions. New inventions include automatic vehicles, better fuel consumption, a better AC system among other features.
Manufacturing Costs of an Old Brand
The process of manufacturing an old brand of vehicle is quite simple and routine. It is a matter of manufacturing mainly the car parts.
The parts are then transferred to one central place to be assembled into the finished product. Some costs are direct while others are hidden costs.
Elements Involved In Manufacturing a Vehicle
The main elements involved in the manufacture of a car are variable and fixed costs. The main direct costs include raw materials, administration costs, direct labor, research and development, logistics, depreciation and other costs including marketing and advertising.
Raw materials used in vehicle manufacture include iron, steel, glass, aluminum, plastic, and also rubber for manufacturing wheels. Other costs include buying of small components.
There are other costs that are hidden yet they must be incurred by the manufacturer on an annual or day to day basis. They include the purchase of insurance policies, maintenance of the factory, operating licenses, accounting and auditing services among others.
Other costs include payment of utility bills such as cleaning services, telephone costs, water, electricity and security services among other costs.
But generally, raw materials and the price of car parts usually make up about 57% of the cost. Research, engineering, development and running of the factory make about 16% of the cost.
While the rest of the items including sales tax for the car, dealer markups, and advertising charges make up the remaining 27% of the cost of the vehicle.
Car fixed costs are expenses that will remain the same whether zero units are manufactured or a million units. Most fixed costs are related to running the company. The costs will be incurred whether the company produces cars or not.
But all the same, some fixed costs eventually go down when the 2nd, 3rd or 4th generation of a new model of a vehicle is manufactured. Though some initial costs of designing, branding and developing the product are usually fixed, but they will only be incurred once.
Fixed costs are the expenses that eventually bring down the cost of a vehicle. The more units being produced and sold, the cheaper the fixed costs become. Also, fixed costs can be shared among other brands if a company has other products or services it provides.
Variable costs, on the other hand, are expenses incurred when manufacturing the vehicle. Variable costs are usually proportional to the number of units manufactured.
Variable costs are basically determined by market costs. The cost of raw materials per unit produced will usually remain more or less the same not unless the manufacturer will enjoy discounts due to ordering in bulk orders. Variable costs include raw materials.
Estimating the Cost of a Vehicle
Car manufacturing companies must factor in every cost of the vehicle. Both fixed and variable costs, both direct costs and hidden costs to determine the actual or estimated manufacturing cost of the vehicle.
The manufacturing cost is then used to determine the selling price of the vehicle to wholesalers and retailers.
The bottom line is that the company manufacturing the vehicle must make a profit. The company usually puts a markup on the estimated cost of manufacturing one unit.
The more cars a company produces and sells, the cheaper it becomes to produce one unit.
It is not possible to get the exact cost of manufacturing a vehicle. Therefore only estimates are used by accountants to determine the cost price and therefore decide on how much the vehicle will be sold.
The cost will depend on whether it is a new brand model or an old brand that has been in the market for decades.
A new car is more expensive to manufacture. Whereas an old brand has systems in place and is more affordable to produce.
But generally, the more the production volume, the cheaper the cost per unit becomes.