Automobile Industry Retail Price Equivalent and Indirect Cost Multipliers

Abstract

When developing environmental regulations, government agencies typically must estimate and consider the cost of the regulation to society. The cost of new regulations to producers, such as vehicle manufacturers, typically shows up in two broad categories: direct manufacturing costs and indirect costs. Direct manufacturing costs include manufacturing labor and direct material costs, which can be estimated via reverse engineering or other approaches. Indirect costs include research and development, corporate operations, dealer support, and marketing and are difficult to estimate because many indirect costs are difficult to allocate to specific production activities or are not affected by levels of production. Because of the difficulties of estimating indirect costs associated with new technologies, the automotive industry has often applied scaling factors to changes in estimated direct costs to capture changes in indirect costs and, hence, predict the full impact vehicle modifications will have on the final selling price. A commonly used scaling factor is the retail price equivalent (RPE) multiplier, which is historically based and compares direct manufacturing costs with all other factors that influence the final price of a vehicle. Regulatory agencies, including the U.S. Environmental Protection Agency (EPA), have used RPE multipliers to scale the direct manufacturing costs associated with a regulation when estimating the total social cost of the regulation. However, a problem in using RPE multipliers in regulatory analysis is that some of the indirect cost components of the RPE multiplier, such as fixed depreciation costs, health care costs for retired workers, or pensions, may not be affected by all vehicle modifications resulting from regulation. This report develops a modified multiplier, referred to as an indirect cost (IC) multiplier, which specifically evaluates the components of indirect costs that are likely to be affected by vehicle modifications associated with environmental regulation. A range of IC multipliers are developed that 1) account for differences in the technical complexity of required vehicle modifications and 2) adjust over time as new technologies become assimilated into the automotive production process.