EPA-420-D-10-100
July 2010
Heavy Duty Truck Retail Price
Equivalent and Indirect Cost
Multipliers
Draft Report
Prepared for
Chi Li
Office of Transportation and Air Quality
Assessment and Standard Division
2000 Traverwood Dr.
Ann Arbor, Ml 48105
Prepared by
Alex Rogozhin
Michael Gallaher
Anthony Lentz
RTI International
3040 Cornwallis Road
Research Triangle Park, NC 27709
Walter McManus
Transportation Research Institute
University of Michigan
2901 Baxter Road
Ann Arbor, Ml 48109
RTI Project Number 0211577.003.002

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RTI Project Number
0211577.003.002
Heavy Duty Truck Retail Price
Equivalent and Indirect Cost
Multipliers
Draft Report
Prepared for
Chi Li
Office of Transportation and Air Quality
Assessment and Standard Division
2000 Traverwood Dr.
Ann Arbor, Ml 48105
Prepared by
Alex Rogozhin
Michael Gallaher
Anthony Lentz
RTI International
3040 Cornwallis Road
Research Triangle Park, NC 27709
Walter McManus
Transportation Research Institute
University of Michigan
2901 Baxter Road
Ann Arbor, Ml 48109
RTI International is a trade name of Research Triangle Institute.

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CONTENTS
Section	Page
1	Introduction	1-1
2	Approaches to Estimate Indirect Costs Without Using Multipliers	2-1
3	RPE Multiplier	3-1
3.1	Previously Published Studies on RPE Multiplier	3-1
3.2	Description of Cost Contributors to RPE Multiplier	3-1
3.3	Data Sources	3-2
3.4	Adjustments to RPE Multiplier Contributors	3-4
3.5	Engine vs. Truck Manufacturer Multipliers	3-8
3.6	Company-Level RPE Multipliers	3-8
3.7	Industry Average RPE Multipliers	3-9
4	IC Multiplier	4-1
4.1	Technology Complexity and Impact on Operations	4-2
4.2	Time Frame and Impact on Operations	4-3
4.3	Adjustment Factors to Cost Contributors	4-3
4.4	Industry Average IC Multipliers	4-7
4.5	IC Multipliers and Net Income	4-7
5	Example Technologies	5-1
5.1	Low Complexity: Single Wide Tires	5-1
5.2	Medium Complexity: Engine Turbo Compounding	5-1
5.3	High Complexity: Hybrid Electric Powertrains	5-2
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6	RPE Multiplier Approach vs. Integrated IC Multiplier and Market Model
Approach	6-1
6.1 Market Model and RPE Multiplier	6-1
7	Summary and Conclusion	7-1
8	References	8-1
Appendix
A RPE Multiplier Calculations for Individual Manufacturers	A-l
LIST OF FIGURES
Number	Page
6-1. RPE Multiplier vs. IC Multiplier Approach	6-2
LIST OF TABLES
Number	Page
3-1.	RPE Multipliers in Previous Studies	3-2
3-2.	RPE Multiplier Cost Contributors	3-3
3-3.	RPE Multipliers and Cost Contributors: 2008	3-5
3-4.	Weighted RPE Multipliers: 2008	3-9
4-1.	Weighted Average IC Multiplier Contributors to RPE: 2008 	4-2
4-2. Short-term Adjustment Factors to Indirect Cost Contributors for Light Duty
Vehicles: Consensus Approach	4-4
4-3. Long-Run Adjustment Factors to Indirect Cost Contributors for Light Duty
Vehicles: Consensus Approach	4-4
4-4. Short-Term Adjustment Factors to Indirect Cost Contributors for Light Duty
Vehicles: Delphi-Based Method	4-5
4-5. Long-Term Adjustment Factors to Indirect Cost Contributors for Light Duty
Vehicles: Delphi-Based Method	4-5
4-6. Resultant Short-Term Adjustment Factors to Indirect Cost Contributors for
Light Duty Vehicles	4-6
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4-7. Resultant Long-Term Adjustment Factors to Indirect Cost Contributors for
Light Duty Vehicles	4-6
4-8. Short- and Long-Term IC Multiplier Calculations for Engine Manufacturers:
2008	4-8
4-9. Short- and Long-Term IC Multiplier Calculations for Truck Manufacturers:
2008	4-10
4-10. Long-Term Indirect Cost Multipliers with Net Income Included	4-12
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SECTION 1
INTRODUCTION
In order to produce a unit of output, heavy duty truck manufacturers incur direct and
indirect costs. Direct costs include cost of materials and labor costs. Indirect costs may be related
to production (such as research and development [R&D]), corporate operations (such as salaries,
pensions, and health care costs for corporate staff), or selling (such as transportation, dealer
support, and marketing). Similarly to direct costs, indirect costs are generally recovered by
allocating a share of the costs to each unit of good sold (Vyas, Santini, and Cuenca, 2000).
Although it is possible to account for direct costs allocated to each unit of good sold, it is more
challenging to account for indirect costs allocated to a unit of good sold. To make a cost analysis
process more feasible, markup factors, which relate indirect costs to the changes in direct costs,
have been developed. These factors are often referred to as retail price equivalent (RPE)
multipliers.
Cost analysts and regulatory agencies (including the U.S. Environmental Protection
Agency [EPA]) have frequently used these multipliers to predict the resultant impact on costs
associated with heavy duty truck manufacturers' responses to regulatory requirements. Clearly
the best approach to determining the impact of changes in direct manufacturing costs on a
manufacturer's indirect costs would be to actually estimate the cost impact on each indirect cost
element. However, doing this within the constraints of an agency's time or budget is not always
feasible, or the technical, financial, and accounting information to carry out such an analysis may
simply be unavailable. Given this, EPA has continued to use RPE multipliers for some of their
regulatory cost analyses.
RPE multipliers provide, at an aggregate level, the relative shares of revenues1 to direct
manufacturing costs. The numerator of this ratio comprises direct costs, indirect costs, and net
income:
RPE multiplier = (direct costs + indirect costs + net income)/(direct costs)
Using RPE multipliers implicitly assumes that incremental changes in direct
manufacturing costs produce common incremental changes in all indirect cost contributors as
well as net income. A concern in using the RPE multiplier in cost analysis for new technologies
(which result from regulations requiring reductions in emissions) is that the indirect costs of
1 Revenue = Direct Costs + Indirect Costs + Net Income
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vehicle modifications are not likely to be the same for different technologies. For example, less
complex technologies could require fewer R&D efforts or less warranty coverage than more
complex technologies. In addition, some simple technological adjustments may, for example,
have no effect on the number of corporate personnel (Rogozhin et al., 2010).
To address this concern, modified multipliers have been developed. These multipliers are
referred to as indirect cost multipliers (or IC multipliers). In contrast to RPE multipliers, IC
multipliers assign unique incremental changes to each indirect cost contributor.
IC multiplier = (direct cost + adjusted indirect cost)/(direct cost)
The incremental change in indirect cost contributors varies based on the complexity of
the technology and the time frame under consideration. Further, there is no reason to expect that
the contributors would be the same for engine manufacturers as for truck manufacturers. This
report uses the methodology developed for "Automobile Industry Retail Price Equivalent and
Indirect Cost Multipliers Report" (the "LD RPE/IC study") (Rogozhin, Gallaher, and McManus,
2009). This report develops IC multipliers for the heavy duty truck manufacturing industry using
financial data from, for reasons highlighted below, Hino, Cummins, PACCAR, Navistar,
Daimler, and Volvo.
We derived two separate sets of IC multipliers: one for engine manufacturers (based on
the data from Cummins and Hino) and another for heavy duty truck manufacturers (based on the
information from PACCAR, Navistar, Daimler, and Volvo). Cummins' market share for heavy
duty truck engines in North America equaled 45% in 2008 (Cummins, 2009), and Hino is one of
the largest suppliers of heavy duty truck engines in Asia. The four heavy duty truck companies
account for an 80% share of the heavy duty truck industry in North America (IBIS, 2010).
Therefore, financial information from these companies serves as a good representation of the
U.S. heavy duty engine and truck industry as a whole.
The remainder of the report is structured as follows: Section 2 discusses published studies
that have attempted to estimate indirect costs without using cost multipliers. Section 3 describes
the methodology, sources, and calculations of the RPE multiplier for the heavy duty engine and
truck manufacturing industries. Section 4 describes the methodology and calculations of the IC
multipliers for the same industries. Section 5 presents example technologies and the IC
multipliers associated with them. Section 6 compares the RPE multiplier approach with the
integrated IC multipliers and market model approach. Section 7 presents a summary of the
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findings and our conclusions, and Appendix A outlines detailed calculations of the RPE
multipliers for individual manufacturers.
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SECTION 2
APPROACHES TO ESTIMATE INDIRECT COSTS WITHOUT USING MULTIPLIERS
This section describes studies that estimate indirect costs in the process of estimating
total production costs. These studies do not rely on the use of multipliers but instead estimate
indirect costs by adding overhead costs, distributing overhead costs in proportion to activities
performed on a product during manufacturing, and mathematical modeling.
There is a set of studies that developed a "bottom-up" approach to calculating indirect
costs, which estimate overhead costs by summing all overhead costs (for example, Son [1991]).
This method requires detailed information about resources consumed to produce a product,
including purchasing, processing, and maintenance costs. EPA also used a similar approach for
its regulatory analyses of rules on nonroad diesel and on locomotive and marine compression
ignition engines. In those analyses, EPA calculated R&D and tooling components of indirect
costs (e.g., EPA, 2004; EPA, 2008).
Activity-based costing (ABC), developed by Cooper and Kaplan (1988), is another
method to estimate indirect costs. This method distributes the overhead costs in proportion to the
activities performed on a product to manufacture it. The method uses activity time estimates such
as labor rates (direct labor costs or direct labor hour rates) or volume-based rates (machine hour,
material cost, or units produced) as bases to calculate overhead rates.
Mathematical modeling has also been used to calculate indirect costs for an Asian
electrical engineering company. Niazi et al. (2007) estimated indirect costs by modeling material
and time-related overhead costs.
When in-depth information and resources are available, one of these approaches might be
appropriate. However, when faced with limited information or time constraints, the multiplier
approach provides an effective and efficient way to estimate indirect costs. In the next section,
we present studies that estimated RPE multipliers in the past and describe our methodology to
estimate RPE and IC multipliers.
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SECTION 3
RPE MULTIPLIER
The RPE multiplier is a ratio that relates direct costs, indirect costs, and net income1 to
direct costs. When multiplied by the direct costs of a new technology, this multiplier is intended
to estimate the effects of the new technology on the costs associated with heavy duty truck
manufacturers' responses to regulatory requirements. RPE multipliers are typically calculated
from a heavy duty truck company's financial statements under the implicit assumption that all
technologies in a company bear the same proportion of indirect costs. The RPE multiplier is
calculated as follows:
, • ,• (Direct Cost + Indirect Cost + Net Income) , (Indirect Cost + Net Income)
RPE Multiplier = 		— = 1 + 		—
Direct Cost	Direct Cost
3.1	Previously Published Studies on RPE Multiplier
The authors of this report were unable to find any studies that estimated RPE multipliers
specifically for heavy duty truck manufacturers (the 1985 Jack Faucett Associates report to EPA
included multipliers for heavy duty engine manufacturers but none for heavy duty truck
manufacturers). However, many of the cost contributors developed for light duty vehicles are
applicable to heavy duty vehicles. Several studies estimated RPE multipliers for the light duty
automobile manufacturing industry. These values are presented in Table 3-1 and range between
1.26 (a value developed for EPA in 1985) and 2.0 (the value for outsourced parts estimated by
researchers at Argonne National Laboratory). The range of multiplier values should serve as an
indicator that using one multiplier for all new technologies should be considered an
approximation in the absence of better information.
3.2	Description of Cost Contributors to RPE Multiplier
Table 3-2 presents the contributors that constitute the RPE multiplier. Components of the
multiplier include manufacturing costs, production overhead costs, corporate overhead costs,
manufacturer selling costs, and manufacturer net income. In addition, we accounted for dealer
costs of selling new vehicles and dealer net income from selling new vehicles. For each
manufacturer, we gathered financial information using annual and 10-K reports and
systematically assigned it to the contributors listed in Table 3-2.
1 Net income is the accounting term that is used for measuring accounting profit.
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Table 3-1. RPE Multipliers in Previous Studies
Study
Year
Findings
Jack Faucett Associates, EPA
1985
1.26
Spinney et al.
1998
1.5
Vyas, Santini, and Cuenca, Argonne National Laboratory
2000
2.0 for components developed
internally 1.5 for outsourced
components
National Research Council
2002
1.4
McKinsey & Company
2003
1.7
Sierra Research, Inc. for Alliance of Automobile Manufacturers
2007
2.0 at least
Rogozhin et al.
2009
1.46
3.3 Data Sources
We used publicly available sources so the results of this study would be replicable and
transparent. We gathered financial information for two heavy duty engine manufacturers
(Cummins, Hino) and four heavy duty truck manufacturers (PACCAR, Navistar, Daimler, and
Volvo). Using several manufacturers instead of one provided more robustness to the results.
The majority of the information for the analysis was obtained from manufacturers' annual
reports and 10-K reports to the Securities and Exchange Commission (SEC). The analysis was
conducted using 2008 data for all manufacturers. Unfortunately, direct and indirect costs are not
standard accounting terms. As a result, each manufacturer presented the breakdown of costs in a
unique fashion, while still following acceptable accounting procedures. We tried to consolidate
these costs in a systematic manner for each manufacturer to be able to average results for the
industry.
Indirect costs associated with new technologies are expected to differ based on the degree
of complexity of the technology and the time frame involved. Technology-specific adjustment
factors used in our methodology were developed for the LD RPE/IC report. These factors were
estimated using two different methods: consensus approach and Delphi-based method. These
methods are briefly described in the remainder of this section. The estimates for both of these
approaches are re-presented in Section 4.3 for convenience. We believe that these factors are
appropriate to use for the heavy duty truck industry given the similar structures of the light duty
vehicle and heady duty truck industries (e.g., similar R&D challenges, similar employee benefits,
similar competitive environment).
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Table 3-2. RPE Multiplier Cost Contributors
Contributor
Description
Manufacturing (Direct Cost)
Manufacturing cost
Production Overhead (Indirect Cost)
Warranty
R&D (research and development)
Depreciation and amortization
Maintenance, repair, operations cost
Corporate Overhead (Indirect Cost)
General and administrative (G&A)
Retirement
Health care
Selling (Indirect Cost)
Transportation
Marketing
Dealer (Indirect Cost)
Dealer new vehicle net income
Dealer new vehicle selling expense
Net Income
Cost of materials and labor cost
Cost of providing product warranty
Cost of developing and engineering the product
Cost related to depreciation and amortization of manufacturing
facilities and equipment
Costs related to maintenance, repair, and operations of manufacturing
facilities and equipment
Costs related to salaries of nonmanufacturing labor, operations of
corporate office, etc.
Cost of pension for nonmanufacturing labor
Costs of health care for nonmanufacturing labor
Costs related to transporting manufactured goods
Costs related to advertising of the manufactured goods (manufacturer
costs).
Net income to dealers from sales of new vehicles
Costs related to sales of the new vehicles by dealers (dealer costs).
Net income to manufacturers
Consensus Approach: EPA's National Vehicle and Fuel Emissions Laboratory assembled
a team of engineers with experience working for auto manufacturers to provide adjustment
factors for the RPE multiplier cost contributors. The team had among them 11 bachelor's degrees
in engineering and physics; 10 master's degrees in engineering, atmospheric chemistry, and
business; and one Ph.D. in mechanical engineering.
Together the team had approximately 100 years of experience working for auto and
engine manufacturers and service companies plus expertise in a wide range of auto technologies,
including (among others) engines, powertrains, onboard diagnostics, fuel economy, and
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emissions controls. The team met five times over a period of 3 weeks and developed consensus
estimates for adjustment factors that capture the differences in the impact of low-, medium-, and
high-complexity technologies on each of the cost contributors to the RPE multiplier.
Delphi-Based Method: EPA also used a process based on the Delphi method and
developed a set of adjustment factors based on the technologies not considered in the RPE/IC
report (Helfand and Sherwood, 2009). These technologies were representative of the low-,
medium-, and high-complexity technology definitions as described in the LD RPE/IC report. The
Delphi-based method used a panel of automotive experts who provided individual, anonymous
estimates of the adjustment factors. These experts then met three times to discuss both the
process and the estimates of adjustment factors. After each meeting, experts were given an
opportunity to change their answers.
3.4 Adjustments to RPE Multiplier Contributors
The way that costs are reported in annual reports may differ from one business to another.
Because of this, assumptions and adjustments were necessary to arrive at RPE multipliers that
would be consistent across companies. For example, we used "cost of sales" reported in annual
reports as an estimate of direct costs. Cost of sales refers to direct costs attributable to the
production of the goods sold by a company, which includes the cost of the materials used in
creating the good along with the direct labor costs used to produce the good. However, the exact
expenses included in cost of sales might differ from one manufacturer to another (Forbes, 2010).
Nevertheless, cost of sales was the best estimate of direct costs reported by all companies.
In some cases, information from secondary sources, such as Heavy Duty Truck
Manufacturers Industry Report by Supplier Relations LLC (referred to as "SR LLC report,"
2009) and Census (2009), was used to fill in the gaps. For instance, Cummins, Hino, PACCAR,
and Daimler did not report maintenance, repair, and operations costs; the factors of 0.01 (for
engine manufacturers Cummins and Hino) and 0.02 (for heavy duty truck manufacturers
PACCAR and Daimler) were calculated using Census data (based on the data for the Other
Engine Equipment Manufacturing Industry [NAICS 333618] and Heavy Duty Truck
Manufacturing Industry [NAICS 336120]). Section A.l of the appendix to this report provides
more details about these adjustments. The results of the procedure are presented in Table 3-3.
We also used data from the SR LLC report and Census to construct an industry average
RPE multiplier for comparison purposes. The average equaled 1.42, which is higher than the
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Table 3-3. RPE Multipliers and Cost Contributors: 2008
Cost Contributor



Engine Manufacturers
Truck Manufacturers
Vehicle Manufacturing
Heavy Duty
Truck
Industry
(Reports)
Engine
Manufacturers
Industry
Average
Truck
Manufacturers
Industry
Average
Hino
Cummins
PACCAR
Navistar
Daimler
Volvo
Manufacturing cost
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
Production Overhead









Warranty
0.03
0.02
0.04
0.01
0.02
0.03
0.02
0.04
0.04
R&D (product development)
0.05
0.04
0.05
0.03
0.04
0.03
0.03
0.05
0.06
Depreciation and amortization
0.05
0.03
0.04
0.04
0.03
0.06
0.03
0.03
0.06
Maintenance, repair,
operations cost
0.02
0.01
0.02
0.01
0.01
0.02
0.03
0.02
0.01
Total production overhead
0.14
0.08
0.14
0.10
0.08
0.13
0.12
0.13
0.17
Corporate Overhead









General and administrative
0.12
0.11
0.07
0.09
0.12
0.03
0.12
0.03
0.12
Retirement
0.01
0.01
0.01
0.01
0.01
0.01
0.03
0.01
0.01
Health
0.01
0.01
0.01
0.02
0.01
0.001
0.02
0.01
0.004
Total corporate overhead
0.15
0.13
0.09
0.12
0.14
0.04
0.16
0.05
0.13
Selling









Transportation
0.00
0.01
0.00
0.01
0.00
0.00
0.00
0.00
0.00
Marketing
0.01
0.01
0.01
0.00
0.01
0.01
0.00
0.01
0.01
(continued)

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Table 3-3. RPE Multipliers and Cost Contributors: 2008 (continued)
Cost Contributor



Engine Manufacturers
Truck Manufacturers
Vehicle Manufacturing
Heavy Duty
Truck
Industry
(Reports)
Engine
Manufacturers
Industry
Average
Truck
Manufacturers
Industry
Average
Hino
Cummins
PACCAR
Navistar
Daimler
Volvo
Dealers









Dealer new vehicle net
income
<0.01
	
<0.01
	
	
<0.01
<0.01
<0.01
<0.01
Dealer new vehicle selling
expense
0.06
	
0.06
	
	
0.06
0.06
0.06
0.06
Total selling and dealer costs
0.08
0.01
0.08
0.01
0.01
0.08
0.07
0.08
0.08
Sum of Indirect Costs
0.37
0.23
0.31
0.23
0.23
0.24
0.35
0.26
0.38
Net Income
0.05
0.05
0.05
0.02
0.06
0.09
0.01
0.07
0.04
Other costs (not included in
contributing costs)
0.00
0.01
0.00
0.01
0.01
0.00
0.00
0.00
0.01
RPE multiplier
1.42
1.28
1.36
1.25
1.29
1.33
1.36
1.34
1.43

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average calculated based on manufacturers' annual reports (1.28 for engine manufacturers and
1.36 for truck manufacturers). The reason for this difference could be that SR LLC report
defined heavy duty industry based on U.S. Census NAICS 336120 (Heavy Duty Truck
Manufacturing Industry),2 while the RPE multiplier calculations in this report are based on four
heavy duty truck and two heavy duty engine manufacturers.
Health care and retirement costs provided in manufacturers' annual reports include
expenditures for both manufacturing and corporate labor. The share of these costs related to
manufacturing labor is a part of manufacturing expenses and, therefore, was added to the
manufacturing cost (direct cost). The share related to corporate workers is a part of indirect costs
and was counted in the health care and retirement cost contributors. To determine how to
attribute these shares, we looked at the Census data (Supplier Relations LLC, 2009). It reported
salaries and wages separately. Salaries are the cost of corporate labor and accounted for 30% of
total labor cost, and wages are the cost of manufacturing labor and accounted for 70% of total
labor cost. Using this information, we assumed that approximately 70% of workers were
involved in manufacturing, while 30% were involved in corporate operations for both heavy duty
engine and truck manufacturers. This assumption is consistent with manufacturing/corporate
labor division calculated for the LD RPE/IC multiplier study (Rogozhin et al., 2009).
Cummins, PACCAR, Navistar, Daimler, and Volvo did not report transportation costs.
Thus, the industry average of 0.004 (industry average based on SR LLC report) was used as a
proxy. PACCAR, Daimler, and Volvo did not report marketing costs. The heavy duty trucks
industry engages in business-to-business marketing rather than business-to-consumer marketing.
Our judgment is that business-to-business marketing costs are significantly lower than business-
to-consumer marketing costs, possibly as low as 3 to 5% of business-to-consumer marketing
costs per unit. We defined business-to-business marketing costs as 20% of the business-to-
consumer marketing costs per unit from Rogozhin et al. (2009) as an upper bound.
The only costs that were added (rather than redistributed from one of the cost items
reported in manufacturers' annual reports) were dealer new vehicle net income and dealer new
vehicle selling expenses. These expenses are acquired by heavy duty truck dealers and are part of
the final price of a vehicle. Given the similar structures of light duty vehicle and heavy duty
2 NAICS 336120 includes manufacturers of heavy duty truck chassis and assemblers of complete heavy duty trucks,
buses, heavy duty motor homes, and other special purpose heavy duty motor vehicles for highways. It also
includes manufacturers of heavy duty motor vehicles and car bodies.
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truck dealers (similar employee benefits, similar competitive environment, etc.) the value from
the LD RPE/IC multiplier report (Rogozhin et al., 2009) was used as a proxy.3
Appendix A presents detailed calculations of cost contributors for each of the six
manufacturers and industry averages based on the secondary sources.
3.5	Engine vs. Truck Manufacturer Multipliers
We calculated two separate RPE multipliers: one for heavy duty engine manufacturers
and another for heavy duty truck manufacturers. The reason for differentiating between engine
and truck manufacturers was the difference in their target markets. Although engine
manufacturers sell product primarily to heavy duty truck manufacturers, heavy duty truck
manufacturers sell product to end users. Because of this, dealer new vehicle selling expenses and
dealer net income are not applicable to engine manufacturers. As a result, the indirect cost
contributors are likely to be different for engine and truck manufacturers; hence, two RPE
multipliers were developed.
3.6	Company-Level RPE Multipliers
Table 3-3 presents the values of cost contributors and RPE multipliers for individual
manufacturers in 2008. Selling and dealer cost contributors were higher for heavy duty truck
manufacturers because of the inclusion of dealer costs and net income. Other expenses, which
are not part of indirect cost contributors, are reflected in Table 3-3 for completeness; they did not
exceed 0.01 for all manufacturers.
To ensure that 2008 was not an outlier year, we looked at a 4-year historical analysis of
indirect cost contributors for individual manufacturers. It would be costly to perform analysis
similar to the one used for the year 2008 for every year, for every manufacturer. However,
manufacturers' readily provided three major indirect cost contributing factors in their annual
reports (selling, administrative, and other expenses; operating and other expenses; and
depreciation). The sum of these factors varied within 9 percentage points in the past 4 years (see
Appendix A for a historical RPE analysis for individual manufacturers).4 Individual
manufacturers' RPE multipliers were averaged in the process of constructing an industry average
RPE multiplier and, thus, diminished the effect of variability of cost contributors for individual
3	In the LD RPE/IC multiplier report, dealer new vehicle net income and new vehicle selling expenses were
constructed using National Automobile Dealers Association (NADA) data. Similar data were not available for
heavy duty truck dealers.
4	If we were to exclude Daimler, which went through restructuring in 2007, the sum of three major cost contributors
varied within 5 percentage points over the 4 years analyzed.
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manufacturers in 2008. This led us to believe that 2008 RPE multipliers are unlikely to be
underestimated.
3.7 Industry Average RPE Multipliers
The industry average RPE multipliers were calculated separately for heavy duty engine
manufacturers and heavy duty truck manufacturers. The industry averages were calculated by
weighting company-level RPE multipliers by their 2008 worldwide production. Table 3-4
presents company-level production alongside company-level RPE multipliers. In 2008, the
industry average RPE multiplier for heavy duty engine manufacturers equaled 1.28, while the
industry average RPE multiplier for heavy duty truck manufacturers equaled 1.36. The 2008
production figures presented in Table 3-4 were also used in Table 3-3 to generate industry-
weighted average individual cost components.
Table 3-4. Weighted RPE Multipliers: 2008
Engine Manufacturer
Annual Production (number of engines/trucks) (2008)
RPE Multiplier
Cummins
108,300
1.29
Hino
45,765
1.25
Weighted average

1.28
Truck manufacturer


PACCAR
125,900
1.33
Navistar
244,100
1.36
Daimler
472,000
1.34
Volvo
251,151
1.43
Weighted average

1.36
Sources: Cummins Inc. 2009. 2008 Annual Report on 10-K Form. Available at: http://phx.corporate-
ir.net/phoenix.zhtmI?c=112916&p=irol-reportsannual. Accessed on February 15, 2010.
IHS Global Insight. September 30, 2009. HIS Global Insight Report: Volvo Trucks (Automotive). Waltham, MA:
IHS Global Insight.
IHS Global Insight. October 01, 2009. HIS Global Insight Report: PACCAR (Automotive). Waltham, MA: IHS
Global Insight.
IHS Global Insight. September 18, 2009. HIS Global Insight Report: Navistar (Automotive). Waltham, MA: IHS
Global Insight.
IHS Global Insight. September 14, 2009. HIS Global Insight Report: Daimler Trucks (Automotive). Waltham, MA:
IHS Global Insight.
IHS Global Insight. September 18, 2009. HIS Global Insight Report: Volvo Trucks (Automotive). Waltham, MA:
IHS Global Insight.
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SECTION 4
IC MULTIPLIER
This section describes calculations of IC multipliers for engine and truck manufacturers.
IC multipliers reflect differences in technology complexity and changes in indirect costs over
time. The motivation is to model the diversity of potential cost impacts under a wide range of
potential future environmental regulations.
In Section 3, we calculated an average RPE multiplier for the heavy duty engine
manufacturing industry of approximately 1.28 and for the heavy duty truck manufacturing
industry of approximately 1.36. These numbers include direct cost components, indirect cost
components, and net income. In this section, we focus solely on indirect cost components that are
likely to be affected by future environmental regulations. We show that only a portion of indirect
cost contributors should be included in the markup factor. Because the resulting markup factors
reflect changes in indirect costs relative to change in direct costs, they are referred to as IC
multipliers.
Regulations that result in implementing different levels of technology complexity are
likely to affect the price of the unit of output with different magnitudes. Regulations that result in
manufacturers implementing a technology with low complexity (such as simply replacing an
existing technology with a better performing technology) would be associated with a lower IC
multiplier. Regulations that result in manufacturers implementing technology with high
complexity (such as installing a technology that requires significant integration efforts) would be
associated with a higher IC multiplier. In addition, the magnitude of impacts of different
technologies is also likely to change over time as new technologies are assimilated. For example,
although R&D expenses are likely to be high in the short term, in the long term, R&D efforts
become less important as technology matures.
In this section, we describe the methodology used to calculate a set of IC multipliers for
engine and truck manufacturers. Table 4-1 lists the indirect cost contributors from Table 3-3 that
are applicable to IC multipliers. In this study we do not include net income among these cost
contributors, mostly because net income results from the interaction of supply and demand.
However, an argument can be made that net income should be included in long-term multipliers,
and this is discussed further in Section 4.5.
Our approach is then to scale cost contributor values up or down depending on the
complexity of the technology (low, medium, or high) and the time frame (short or long term).
4-1

-------
Table 4-1. Weighted Average IC Multiplier Contributors to RPE: 2008

Heavy Duty Engine
Heavy Duty Truck
Cost Contributor
Manufacturers
Manufacturers
Production Overhead


Warranty
0.02
0.04
R&D (product development)
0.04
0.05
Depreciation and amortization
0.03
0.04
Maintenance, repair, operations cost
0.01
0.02
Total production overhead
0.08
0.14
Corporate Overhead


General and administrative
0.11
0.07
Retirement
0.01
0.01
Health care
0.01
0.01
Total corporate overhead
0.13
0.09
Selling


Transportation
0.01
0.00
Marketing
0.01
0.01
Dealers


Dealer new vehicle selling cost
—
0.06
Total selling and dealer costs
0.01
0.08
Sum of Indirect Costs
0.23
0.31
4.1 Technology Complexity and Impact on Operations
We identify three levels of technology complexity: low, medium, and high. Technology
complexity was based on work by Henderson and Clark (1990).1
Low-complexity technology introduces only minor changes to an existing product, using
an established design. The underlying core design concepts and the links between them remain
the same. An example of such technology in the heavy duty truck industry is single wide tires,
because they simply replace existing tires and require no vehicle redesign or part-integration
effort by the heavy duty truck manufacturer.
1 A more thorough discussion of the rationale of using three technology levels and their impacts on operations can
be found in Rogozhin et al. (2010).
4-2

-------
Medium-complexity technology changes either the architecture of how the components
interact with each other or the core concept of the technology, but not both. An example of such
technology in the heavy duty truck industry is engine turbo compounding. This technology
would require some redesign and integration effort, since the parts' interaction with each other
would have to be changed.
High-complexity technology establishes a set of new core design concepts embodied in
components that are linked together in a new architecture. An example of such technology in the
heavy duty truck industry is hybrid-electric powertrains because they represent an entirely new
approach to propulsion relative to reliance on an internal combustion engine.
4.2	Time Frame and Impact on Operations
The time frame adds another dimension to this study. Many of the indirect costs are likely
to be one-time or short-term activities, such as educating dealers and upgrading mechanics'
equipment. These costs will not appear in the long-term IC multipliers. In addition, incremental
R&D expenditures will occur over a short period of time, even though they may be amortized
over 5 to 10 years (IRS, 2008). Thus, we expect to see higher indirect costs initially and lower
impacts in the long term as companies assimilate the new technologies.
4.3	Adjustment Factors to Cost Contributors
The reason for developing adjustment factors was the fact that the cost contributors in
Table 4-1 would not all respond the same to new technologies. Warranty costs, for instance,
would probably be higher per dollar of direct costs for more complex technologies, because there
would be more opportunities for failure. There is, however, no public information to estimate
how indirect costs vary with different technologies. Instead, we relied on expert judgment.
In two separate processes, a team of EPA engineers evaluated how new technologies of
different complexities (low, medium, and high) would affect indirect cost contributors in the
short and long terms for light duty vehicles. The first process was a consensus approach, and the
second was based on the Delphi method (these approaches are described in Section 3.2).
In both approaches, the team developed the adjustment factors with 0 and 1 as
calibration units. An adjustment factor of 1 indicates that implementing the technology had an
effect equal to the average effect of that indirect cost contributor per dollar of direct cost. For
instance, the warranty cost per dollar of a new technology would equal the average warranty cost
per dollar for the company. An adjustment factor of 0 indicated that implementing the
technology did not affect that indirect cost contributor. For example, a new technology might not
affect corporate overhead.
4-3

-------
Tables 4-2 and 4-3 present the adjustment factors from the consensus process for light
duty vehicles. Table 4-2 presents adjustment factors for the short term, while Table 4-3 presents
adjustment factors for the long term (for a detailed discussion of the development of these
factors, refer to Rogozhin et al. [2009]).
Table 4-2. Short-term Adjustment Factors to Indirect Cost Contributors for Light Duty
Vehicles: Consensus Approach
Indirect Cost	Low Medium	High
Production Overhead
Warranty	1.2	1.6	2.0
R&D	0.2	1.1	2.0
Depreciation and amortization	0	0	1.0
Maintenance, repair, operations	0	0	1.0
Corporate Overhead
General and administrative	0	0	0.5
Retirement	0	0	0.5
Healthcare	0	0	0.5
Selling
Transportation	0	0	0.3
Marketing	0	1	1.5
Dealer new vehicle selling expense	0.1	1	1.5
Table 4-3. Long-Run Adjustment Factors to Indirect Cost Contributors for Light Duty
Vehicles: Consensus Approach
Indirect Cost	Low	Medium	High
Production Overhead
Warranty	0.6	0.8	1
R&D	0	0	0.3
Depreciation and amortization	0	0	1
Maintenance, repair, operations	0	0	1
Corporate Overhead
General and administrative	0	0	0.5
Retirement	0	0	0.5
Health care	0	1	0.5
Selling
Transportation	0	0	0.3
Marketing	0	0	0
Dealer new vehicle selling expense	0	0.3	1
4-4

-------
Tables 4-4 and 4-5 present the adjustment factors from the Delphi-based method for light
duty vehicles. Table 4-4 presents adjustment factors for the short term, while Table 4-5 presents
adjustment factors for the long term.2
Table 4-4. Short-Term Adjustment Factors to Indirect Cost Contributors for Light Duty
Vehicles: Delphi-Based Method
Indirect Cost
Low
Med
High
Production Overhead
Warranty
R&D
Depreciation and amortization
Maintenance, repair, operations
Corporate Overhead
General and administrative
Retirement
Health care
Selling
Transportation
Marketing
Dealer new vehicle selling expense
0.361
0.822
0.373
0.488
0.339
0.385
0.346
0.436
0.215
0.250
1.386
1.481
0.585
0.712
0.579
0.412
0.408
0.143
0.821
0.626
2.289
3.732
1.444
1.396
1.057
0.565
0.635
0.829
1.511
1.296
Table 4-5. Long-Term Adjustment Factors to Indirect Cost Contributors for Light Duty
Vehicles: Delphi-Based Method
Indirect Cost
Low
Med
High
Production Overhead
Warranty
R&D
Depreciation and amortization
Maintenance, repair, operations
Corporate Overhead
General and administrative
Retirement
Health care
Selling
Transportation
Marketing
Dealer new vehicle selling expense
0.168
0.372
0.281
0.377
0.286
0.385
0.331
0.393
0.207
0.229
0.964
0.901
0.466
0.451
0.425
0.393
0.354
0.143
0.569
0.426
1.518
2.018
0.951
1.092
0.671
0.524
0.516
0.604
0.829
0.694
2 For a detailed discussion of the development of these factors, refer to Helfand and Sherwood (2009).
4-5

-------
To arrive at the final adjustment factors used in this study, we averaged adjustment
factors from two approaches for low- and medium-complexity technologies and kept estimates
from the two approaches for high-complexity technologies (thus creating two sets: High 1 [from
the consensus approach] and High 2 [from the Delphi-based method]).3 The resulting adjustment
factors are presented in Table 4-6 (short term) and Table 4-7 (long term).
Table 4-6. Resultant Short-Term Adjustment Factors to Indirect Cost Contributors for
Light Duty Vehicles
Indirect Cost	Low	Med	High 1	High 2
Production Overhead
Warranty	0.78	1.49	2.00	2.29
R&D	0.51	1.29	2.00	3.73
Depreciation and amortization	0.19	0.29	1.00	1.44
Maintenance, repair, operations		0.24	0.36	1.00	1.40
Corporate Overhead
General and administrative	0.17	0.29	0.50	1.06
Retirement	0.19	0.21	0.50	0.57
Health care		0.17	0.20	0.50	0.64
Selling
Transportation	0.22	0.07	0.30	0.83
Marketing	0.11	0.91	1.50	1.51
Dealer new vehicle selling expense	0.18	0.81	1.50	1.30
Table 4-7. Resultant Long-Term Adjustment Factors to Indirect Cost Contributors for
Light Duty Vehicles
Indirect Cost Low	Med	High 1	High 2
Production Overhead
Warranty	0.38	0.88	1.00	1.52
R&D	0.19	0.45	0.30	2.02
Depreciation and amortization	0.14	0.23	1.00	0.95
Maintenance, repair, operations	0.19	0.23	1.00	1.09
Corporate Overhead
General and administrative	0.14	0.21	0.50	0.67
Retirement	0.19	0.20	0.50	0.52
Health care		0.17	0.68	0.50	0.52
Selling
Transportation	0.20	0.07	0.30	0.60
Marketing	0.10	0.28	0.00	0.83
Dealer new vehicle selling expense	0.11	0.36	1.00	0.69
3 High 1 and High 2 are used because two processes yielded substantially different results for high-complexity
technologies, and EPA believed these differences were meaningful given the two technologies considered in the
two different processes.
4-6

-------
4.4	Industry Average IC Multipliers
Each contributor in Table 4-1 was then multiplied by an associated set of adjustment
factors presented in Tables 4-6 and 4-7. These calculations are presented in Tables 4-8 (engine
manufacturers) and 4-9 (truck manufacturers). For example, the warranty cost contributor for
engine manufacturers in Table 3-3 is 0.02. This value was then multiplied by 0.78, 1.49, 2.0, and
2.29 (from Table 4-2, for low, medium, High 1, and High 2 complexity technologies,
respectively) to arrive at adjusted short-term indirect contributors of 0.01, 0.02, 0.03, and 0.04
(see Table 4-3). Finally, adjusted indirect cost contributors were added for each complexity and
time frame to calculate the IC multipliers.
4.5	IC Multipliers and Net Income
The goal for either the RPE multiplier or the IC multiplier is to improve the estimate of
the total costs of a new technology. In this context, the role of net income needs careful
consideration. Net income results from an interaction of supply and demand curves for a product.
The total effect on net income depends on the relative slopes of the supply and demand curves:
although a reduction in quantity and an increase in cost hurt net income, a price increase can
offset some or all of these effects (Rogozhin et al., 2010).
However, an argument can be made that net income is not only the result of supply and
demand interactions; businesses repay shareholders for the use of their capital investment. In this
sense, net income is a cost of doing business: if a business cannot pay a return on its capital costs
comparable to that in other industries, investors will move their money into other businesses, and
the company will not be able to survive. Shareholders may be willing to accept losses in the short
term in exchange for higher returns over time, but, in the long term, net income should be
sufficient to keep shareholders investing in a company. According to this argument, net income
should be included at least in the long-term multipliers (Rogozhin et al., 2010).
The IC multipliers presented in this report do not include net income. Since the ratio of
net income to indirect cost is estimated to be 0.05 (see Table 3-3), inclusion of net income in the
long-term IC multipliers would increase these values by 0.05. Table 4-10 presents long-term IC
multipliers with net income included.
4-7

-------
Table 4-8. Short- and Long-Term IC Multiplier Calculations for Engine Manufacturers: 2008
RPE
Multiplier
Approach	IC Multiplier Approach

Weighted
Short-Term Effects

Long-Term Effects

Average
Industry
Indirect
Cost
Contrib-
utors to
RPE
Low-
Complexity
Technology
Medium-
Complexity
Technology
High-
Complexity
Technology 1
High-
Complexity
Technology 2

Low-
Complexity
Technology
Medium-
Complexity
Technology
High-
Complexity
Technology 1
High-
Complexity
Technology 2
RPE and IC
Multiplier
Contributors
Adjust-
ment
Factor
IC
Multi-
plier
Adjust-
ment
Factor
IC
Multi-
plier
Adjust-
ment
Factor
IC
Multi-
plier
Adjust-
ment
Factor
IC
Multi-
plier

Adjust- IC
ment Multi-
Factor plier
Adjust-
ment
Factor
IC
Multi-
plier
Adjust-
ment
Factor
IC
Multi-
plier
Adjust-
ment
Factor
IC
Multi-
plier
Manufacturing
Manufacturing
Cost
1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00
Production
overhead

















Warranty
0.02
0.78
0.01
1.49
0.02
2.00
0.03
2.29
0.04

0.38 0.01
0.88
0.01
1.00
0.02
1.52
0.02
R&D (product
development)
Depreciation
and
amortization
0.04
0.03
0.51
0.19
0.02
0.01
1.29
0.29
0.05
0.01
2.00
1.00
0.07
0.03
3.73
1.44
0.13
0.04

0.19 0.01
0.14 <0.01
0.45
0.23
0.02
0.01
0.30
1.00
0.01
0.03
2.02
0.95
0.07
0.03

















Maintenance,
0.01
0.24
<0.01
0.36
0.01
1.00
0.01
1.40
0.02

0.19 <0.01
0.23
<0.01
1.00
0.01
1.09
0.01
repair,
operations
cost

















Total
production
overhead
0.08

0.04

0.08

0.15

0.23

0.02

0.04

0.07

0.14
Corporate
Overhead

















General and
administra-
tive
0.11
0.17
0.02
0.29
0.03
0.50
0.06
1.06
0.12

0.14 0.02
0.21
0.02
0.50
0.06
0.67
0.07
Retirement
0.01
0.19
<0.01
0.21
<0.01
0.50
<0.01
0.57
<0.01

0.19 <0.01
0.20
<0.01
0.50
<0.01
0.52
<0.01
Health
0.01
0.17
<0.01
0.20
<0.01
0.50
0.01
0.64
0.01

0.17 <0.01
0.68
0.01
0.50
0.01
0.52
0.01
Total corporate
overhead
0.13

0.02

0.04

0.07

0.13

0.02

0.03

0.07

0.09
(continued)

-------
Table 4-8. Short- and Long-Term IC Multiplier Calculations for Engine Manufacturers: 2008 (continued)

RPE
Multiplier
Approach
IC Multiplier Approach

Weighted
Short-Term Effects

Long-Term Effects

Average
Industry
Indirect
Cost
Contrib-
utors to
RPE
Low-
Complexity
Technology
Medium-
Complexity
Technology
High-
Complexity
Technology 1
High-
Complexity
Technology 2

Low-
Complexity
Technology
Medium-
Complexity
Technology
High-
Complexity
Technology 1
High-
Complexity
Technology 2
RPE and IC
Multiplier
Contributors
Adjust- IC
ment Multi-
Factor plier
Adjust- IC
ment Multi-
Factor plier
Adjust- IC
ment Multi-
Factor plier
Adjust- IC
ment Multi-
Factor plier

Adjust- IC
ment Multi
Factor -plier
Adjust- IC
ment Multi-
Factor plier
Adjust- IC
ment Multi-
Factor plier
Adjust- IC
ment Multi-
Factor plier
Selling
Transportation
0.01
0.22 <0.01
0.07 <0.01
0.30 <0.01
0.83 <0.01

0.20 <0.01
0.07 <0.01
0.30 <0.01
0.60 <0.01
Marketing
0.01
0.11 <0.01
0.91 0.01
1.50 0.01
1.51 0.01

0.10 <0.01
0.28 <0.01
0 0
0.83 0.01
Dealers
Dealer new
vehicle net




















income
ealer new
vehicle
selling cost




















Total selling
and dealer
contributors
0.01
<0.01
0.01
0.01
0.02

<0.01
<0.01
<0.01
0.01
Sum of Indirect
Costs
0.23
0.06
0.13
0.23
0.38

0.04
0.08
0.14
0.24
Net income
0.05
— —
— —
— —
— —

— —
— —
— —
— —
Other costs
(not
included in
contributing
costs)
0.01









RPE/IC
Multiplier
1.28
1.06
1.13
1.23
1.38

1.04
1.08
1.14
1.24

-------
Table 4-9. Short- and Long-Term IC Multiplier Calculations for Truck Manufacturers: 2008

RPE

















Multiplier
Approach






IC Multiplier Approach







Weighted
Short-Term Effects

Long-Term Effects

Average
Low-
Medium-
High-
High-

Low
-
Medium-
High-
High-

Industry
Indirect
Cost
Contrib-
utors to
Complexity
Technology
Complexity
Technology
Complexity
Technology 1
Complexity
Technology 2

Complexity
Technology
Complexity
Technology
Complexity
Technology 1
Complexity
Technology 2
RPE and IC
Multiplier
Adjust-
ment
IC
Multi-
Adjust-
ment
IC
Multi-
Adjust-
ment
IC
Multi-
Adjust-
ment
IC
Multi-

Adjust-
ment
IC
Multi
Adjust-
ment
IC
Multi-
Adjust-
ment
IC
Multi-
Adjust-
ment
IC
Multi-
Contributors
RPE
Factor
plier
Factor
plier
Factor
plier
Factor
plier

Factor
-plier
Factor
plier
Factor
plier
Factor
plier
Manufacturing


















Manufacturing
1.00

1.00

1.00

1.00

1.00


1.00

1.00

1.00

1.00
Cost


















Production


















overhead


















Warranty
0.04
0.78
0.03
1.49
0.05
2.00
0.07
2.29
0.08

0.38
0.01
0.88
0.03
1.00
0.04
1.52
0.06
R&D (product
0.05
0.51
0.02
1.29
0.06
2.00
0.09
3.73
0.17

0.19
0.01
0.45
0.02
0.30
0.01
2.02
0.09
development)


















Depreciation
0.04
0.19
0.01
0.29
0.01
1.00
0.04
1.44
0.06

0.14
0.01
0.23
0.01
1.00
0.04
0.95
0.04
and


















amortization


















Maintenance,
0.02
0.24
<0.01
0.36
0.01
1.00
0.02
1.40
0.02

0.19
0.00
0.23
0.00
1.00
0.02
1.09
0.02
repair,


















operations
cost


















Total
0.14

0.06

0.13

0.22

0.33


0.03

0.07

0.11

0.20
production
overhead


















Corporate
Overhead


















General and
0.07
0.17
0.01
0.29
0.02
0.50
0.04
1.06
0.07

0.14
0.01
0.21
0.01
0.50
0.04
0.67
0.05
administra-


















tive


















Retirement
0.01
0.19
<0.01
0.21
0.00
0.50
0.01
0.57
0.01

0.19
0.00
0.20
0.00
0.50
0.01
0.52
0.01
Health
0.01
0.17
<0.01
0.20
0.00
0.50
0.01
0.64
0.01

0.17
0.00
0.68
0.01
0.50
0.01
0.52
0.01
Total corporate
0.09

0.02

0.03

0.05

0.09


0.01

0.02

0.05

0.06
overhead


















(continued)

-------
Table 4-9. Short- and Long-Term IC Multiplier Calculations for Truck Manufacturers: 2008 (continued)

RPE
Multiplier
Approach
IC Multiplier Approach

Weighted
Short-Term Effects

Long-Term Effects

Average
Industry
Indirect
Cost
Contrib-
utors to
RPE
Low-
Complexity
Technology
Medium-
Complexity
Technology
High-
Complexity
Technology 1
High-
Complexity
Technology 2

Low-
Complexity
Technology
Medium-
Complexity
Technology
High-
Complexity
Technology 1
High-
Complexity
Technology 2
RPE and IC
Multiplier
Contributors
Adjust- IC
ment Multi-
Factor plier
Adjust- IC
ment Multi-
Factor plier
Adjust- IC
ment Multi-
Factor plier
Adjust- IC
ment Multi-
Factor plier

Adjust- IC
ment Multi
Factor -plier
Adjust- IC
ment Multi-
Factor plier
Adjust- IC
ment Multi-
Factor plier
Adjust- IC
ment Multi-
Factor plier
Selling
Transportation
0.00
0.22 <0.01
0.07 <0.01
0.30 <0.01
0.83 <0.01

0.20 <0.01
0.07 <0.01
0.30 <0.01
0.60 <0.01
Marketing
0.01
0.11 <0.01
0.91 0.01
1.50 0.01
1.51 0.01

0.10 <0.01
0.28 <0.01
0 0
0.83 0.01
Dealers










Dealer new
vehicle net
0.00









income










Dealer new
vehicle
selling cost
0.06
0.18 0.01
0.81 0.05
1.50 0.09
1.30 0.08

0.11 0.01
0.36 0.02
1.00 0.06
0.69 0.04
Total selling
and dealer
contributors
0.08
0.01
0.06
0.10
0.09

0.01
0.02
0.06
0.05
Sum of Indirect
Costs
0.31
0.09
0.21
0.37
0.52

0.05
0.11
0.22
0.31
Net income
0.05
— —
— —
— —
— —

— —
— —
— —
— —
Other costs
(not
included in
contributing
costs)
0.00









RPE/IC
Multiplier
1.36
1.09
1.21
1.37
1.52

1.05
1.11
1.22
1.31

-------
Table 4-10. Long-Term Indirect Cost Multipliers with Net Income Included
Time Frame
Low
Medium
High 1
High 2
Engine manufacturers
1.09
1.13
1.19
1.29
Truck manufacturers
1.10
1.16
1.27
1.36
4-12

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SECTION 5
EXAMPLE TECHNOLOGIES
This section provides examples of low-, medium-, and high-complexity technologies.
Single wide tires is used as an example of a low-complexity technology, engine turbo
compounding as an example of a medium-complexity technology, and hybrid-electric
powertrains as an example of a high-complexity technology.
5.1	Low Complexity: Single Wide Tires
Single wide tires are designed to improve fuel economy by reducing the tires' rolling
resistance and decreasing the mass of the tire and wheel assemblies. A 17-inch wide single tire
replaces conventional dual tires on the drive and trailer axles. EPA estimated that, on average,
this technology can reduce nitrogen oxides (NOx) emissions by 30% and improve fuel efficiency
by 6% when traveling at highway speeds (EPA, 2005).
Implementing this technology will require truck manufacturers to purchase single wide
tires. Implementing this technology does not require a change in core structure or redesign of
architecture. Single wide tires are installed in place of stock tires with a low degree of additional
testing and development required. This example assumes that significant modifications will not
be required in the chassis or suspension components. This technology is an example of a low-
complexity technology. Short-term IC multipliers for this technology complexity equaled 1.06
for engine manufacturers and 1.09 for truck manufacturers. Long-term IC multipliers equaled
1.04 for engine manufacturers and 1.05 for truck manufacturers.
5.2	Medium Complexity: Engine Turbo Compounding
Engine turbo compounding adds a power turbine to the exhaust system downstream from
the turbocharger, which extracts additional energy from exhaust gases and supplies it to the
engine's crankshaft (Scania, 2010). Manufacturers claim a 5% increase in fuel economy coupled
with an increase in horsepower (Detroit Diesel Corporation, 2010).
This example assumes that implementing this technology in mass production requires
vehicle manufacturers to integrate the technology with the other vehicle systems, such as the
engine and exhaust system. However, the core tasks of the engine and exhaust system are not
changed. This technology is an example of a medium-complexity technology. Short-term IC
multipliers for this technology complexity equaled 1.13 for engine manufacturers and 1.21 for
truck manufacturers. Long-term IC multipliers equaled 1.08 for engine manufacturers and 1.11
for truck manufacturers.
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5.3 High Complexity: Hybrid Electric Powertrains
Hybrid electric heavy duty vehicles are in various stages of development by almost all
major heavy duty truck manufacturers. Hybrid vehicles have two basic types of driveline
structure. The most common, parallel hybrid, is where the engine drives the powertrain and a
generator helps recharge the battery. A second type, a series hybrid, is where the engine does not
drive the powertrain but always drives the motor/generator to move the vehicle and recharge the
battery. Reductions in carbon dioxide emissions vary between 15% and 30% (Ricardo Inc.,
2008).
Production of a hybrid vehicle would require truck manufacturers to not only redesign the
physical and electronic architecture to accommodate the additional electric drive components,
but also to redesign the core structure of the main driveline components, including the
transmission, engine, and other elements of the propulsion system. This technology is an
example of a high-complexity technology. Short-term IC multipliers for this technology
complexity (High 1) equaled 1.23 for engine manufacturers and 1.37 for truck manufacturers.
Long-term IC multipliers equaled 1.14 for engine manufacturers and 1.22 (High 1) and for truck
manufacturers.
High 2 technology complexity might be applicable for technologies currently in the
research or development stage but not yet in the production phase. Plug-in hybrid was used as an
example of such technology complexity in the LD RPE/IC study; it is not clear whether such
technologies exist among heavy duty truck technologies. If they did exist, short-term multipliers
that would be used equal 1.38 for engine manufacturers and 1.52 for truck manufacturers. Long-
term multipliers for High 2 technology complexity equaled 1.24 for engine manufacturers and
1.31 for truck manufacturers.
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SECTION 6
RPE MULTIPLIER APPROACH VS. INTEGRATED IC MULTIPLIER AND MARKET
MODEL APPROACH
Executive Order 12866, "Regulatory Planning and Review," issued in 1993, requires
federal agencies to estimate the benefits and costs of significant regulatory actions. Circular A-4
of the Office of Management and Budget and EPA's Guidelines for Preparing Economic
Analyses stipulate use of a microeconomic framework to analyze the benefits and costs. This
section discusses the relationship between the RPE and IC multipliers developed in this report
and the microeconomic framework in which they are used.
The RPE multiplier approach has been used as a method to estimate the change in
indirect costs that are included in the total cost of a regulation. This approach has typically
included using all indirect cost categories and net income to develop a multiplier that is then
applied to the estimated direct manufacturing costs. The projected change in the retail price times
the quantity affected is then used in the estimate of the full cost of the regulation.
The IC multipliers approach addresses two shortcomings of the RPE multiplier approach.
First, as we discuss in previous sections of this report, regulations will most likely not affect all
categories of indirect costs. The indirect costs affected will vary by the complexity of the
technology and will change over time (short term versus long term). In Section 4, we developed
a series of IC multipliers to capture these factors. Second, applying the RPE alone does not
account for market effects and hence does not yield an accurate estimate of the change in market
price (and produces no estimate of the change in market quantity). The IC multiplier approach
identifies the appropriate shift in the supply curve from which market effects (changes in price
and quantity) can be analyzed.
6.1 Market Model and RPE Multiplier
Direct manufacturing costs and indirect costs resulting from a regulation reflect shifts in
the total cost of production. In a market framework, this is represented by a shift in the supply
function. Consider the following scenario presented in Figure 6-1. Initially the market is in
equilibrium. Manufacturers produce quantity Qi and buyers purchase that quantity at the price of
Pi per vehicle (point A). Then a regulation is passed requiring manufacturers to implement a new
technology. The added cost shifts the supply curve upward. The shift equals the per-unit cost of
regulation, which includes both direct and indirect costs.
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Price
Si: With Regulation
S0: Without Regulation
D
Qs Q2 Qi
Quantity
Figure 6-1. RPE Multiplier vs. IC Multiplier Approach
The RPE multiplier approach assumes that the multiplier captures the full market impact
of the new cost. Sales continue at Qi, and the price will rise to P2 (point B). The RPE multiplier
approach implies that demand is perfectly inelastic and there is a full pass-through of costs to
consumers.
However, if the demand curve is less than perfectly inelastic (as shown in Figure 6-1),
consumers will demand fewer vehicles as the price increases. A new equilibrium will be
determined at the intersection of the supply and demand curves (point C). The new price will be
P3 and the new output will be Q2. As a result, the final cost of the regulation (social cost) will be
slightly less than the original cost estimate because of the decrease in quantity being produced.
The original cost estimate, based on the operation at point B, would be the area between lines So
and Si, the price axis, and quantity Qi. The actual social cost is the area between lines So and Si,
the price axis, and points A and C; it is smaller than the original cost estimate by triangle ABC.
The market analysis represented in Figure 6-1 also suggests the reason not to include net
income in the IC multiplier. The RPE approach implicitly assumes disequilibrium in the market.
Manufacturer net income is calculated by assuming production at point B, even though
consumers are not willing to pay P2 and buy Qi vehicles. In reality, both price and quantity will
change in response to the shift in costs. The impact on manufacturer net income is determined by
the elasticities of the supply and demand curves. Manufacturers and consumers typically share
6-2

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the burden of the compliance costs. Indeed, if net income were fully included in costs, then
producers would not be affected by regulations: their net income would be the same before and
after the change. It is common, however, for a rule to affect net income; indeed, manufacturers
often object to rules on this basis.
In a long-term model of a perfectly competitive industry, microeconomic theory predicts
that full costs are passed along to consumers. The perfect competition model assumes that firms
make zero economic profits (that is, net income including all opportunity costs) before the
regulation; the increased costs associated with the regulation will make profits negative if they
are not able to pass them along. This is similar to assuming that the supply curve is horizontal in
the long term. As a result, firms will exit the industry, until quantity supplied equals quantity
demanded at price P2, quantity Q3. In an imperfectly competitive industry, firms are predicted to
have economic profits greater than zero. When imperfectly competitive firms face increased
costs, they seek to mitigate losses in production by not passing along the full costs; the quantity
will not fall as much as Q3, and the price will not rise as much as P2.
Another factor that is difficult to predict in this setting is the effects of new technologies
on consumer demand. Some changes may be invisible to consumers and will not affect their
demand. Others, such as technologies that increase fuel economy with little other observable
effect to the consumer, may increase demand. Finally, some technological changes may reduce
demand, although truck makers and regulators are not likely to pursue undesirable changes as
long as more attractive alternatives exist. Any shifts in the demand curve due to new
technologies should be included in regulatory impact analyses of new requirements. They should
not, however, affect the estimate of indirect costs used to shift the supply curve. The RPE
approach omits demand shifts as well as market adjustments due to the shifting supply curve.
The IC multiplier models the appropriate shift in the supply curve (including direct
manufacturing costs and relevant indirect costs) that then can be used in a market analysis to
determine a new equilibrium price and quantity and, hence, the total cost of the regulation. A
market analysis, pivoting on the new equilibrium generated from the IC multiplier approach,
determines the distribution of regulatory burden between producers and consumers consistent
with economic theory.
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SECTION 7
SUMMARY AND CONCLUSION
The RPE multiplier has historically been used to estimate the indirect costs that are
included in the total cost of vehicle modification. This approach has typically included all
indirect cost categories and net income to develop a multiplier that is then applied to the
estimated direct manufacturing costs. The weighted average RPE multiplier for engine
manufacturers equaled 1.28 in 2008, while the weighted average RPE multiplier for truck
manufacturers equaled 1.36 in 2008. However, a key problem in using RPE multipliers in cost
analysis is that not all contributors to indirect costs are affected in the same way by new
technologies. Some changes may lead to higher indirect costs, and some lower, depending of the
complexity and timing of the new technologies being introduced.
This report calculates modified multipliers, referred to as IC multipliers. IC multipliers
explicitly recognize that technologies differ in their indirect cost requirements. In an ideal world,
the calculation of costs of new technologies would include indirect costs specific to the
technology. When resources are not available to conduct such an in-depth analysis, multipliers
can provide an approximation of those indirect costs. Because those indirect costs are likely to
vary both with the complexity of the technology and with the time frame, the IC multipliers
calculated here are expected to provide superior estimates of the actual costs of a new technology
compared to using RPE multipliers. We find that IC multipliers range from 1.06 to 1.38 in the
short term and from 1.04 to 1.24 in the long term for heavy duty engine manufacturers, and from
1.09 to 1.52 in the short term and from 1.05 to 1.31 in the long term for heavy duty truck
manufacturers.
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SECTION 8
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IHS Global Insight. September 18, 2009. HIS Global Insight Report: Navistar (Automotive).
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Ricardo, Inc. June 2008. A Study of Potential Effectiveness of Carbon Dioxide Reducing Vehicle
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Rogozhin, A., M. Gallaher, G. Helfand, and W. McManus. 2010. "Using Indirect Cost
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U.S. Environ mental Protection Agency (EPA). 2005. "Effect of Single Wide Tires and Trailer
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Division, Argonne National Laboratory.
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APPENDIX A
CALCULATION OF RPE MULTIPLIERS FOR INDIVIDUAL MANUFACTURERS
This appendix describes calculations of RPE multipliers for the heavy duty truck
manufacturing industry as a whole and for individual heavy duty truck and engine
manufacturers. The appendix is structured in the following manner:
¦	Appendix A.l: Heavy Duty Truck Industry (Supplier Relations LLC, Census)
Appendix A.2: Cummins
Appendix A.3: Hino
Appendix A.4: PACCAR
¦	Appendix A.5: Navistar
Appendix A.6: Daimler
¦	Appendix A.7: Volvo
A.l Heavy Duty Truck Industry (Supplier Relations LLC, Census)
An industry report by Supplier Relations LLC (referred to as "SR LLC report") presents
heavy duty truck industry income statements and balance sheets (2009). The industry report was
based on data from the U.S. Census, McKinsey & Company, and industry associations. These
costs are presented in Table A-l. In instances where cost contributors were unavailable from SR
LLC report, we used Census data or pivoted off cost contributors from the LD RPE/IC study. We
describe these calculations below.
The manufacturing cost was calculated by adding cost of materials and wages. One can
notice that the total for manufacturing costs ($14,652 million) is less than the sum of
manufacturing costs for four manufacturers (PACCAR, Navistar, Daimler, and Volvo).
Manufacturing costs for these four companies include their global operations, while
manufacturing costs from the SR LLC report are mainly based on U.S. operations. We can,
nevertheless, compare cost contributors derived using the SR LLC report data with individual
company contributors, because they represent ratios and not absolute quantities.
The SR LLC report did not report warranty and R&D costs. We used the LD RPE/IC
study's cost contributors as a proxy. The SR LLC report also did not report maintenance, repair,
and operations (MRO) costs. We used the data from the U.S. Census Other Engine Equipment
A-l

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Table A-l. Supplier Relations LLC, Census RPE Multiplier Calculations: 2008
RPE Multiplier Contributor
Expense ($
Million)
Relative to
Manufacturing Cost
Calculation and Source
Vehicle Manufacturing
Manufacturing cost	14,652.0
Production Overhead
Warranty
R&D (product development)
Depreciation and amortization	692.0
Maintenance, repair, operations cost for	232.8
engine manufacturers (truck
manufactures in brackets)
1.00
0.03
0.05
0.05
0.02
Cost of materials (13,896) [p. 161, Supplier
Relations LLC, 2009] + Wages (756) [p. 161,
Supplier Relations LLC, 2009]
LD RPE/IC Study (only used to break out
G&A)
LD RPE/IC Study (only used to break out
G&A)
Depreciation, depletion, and amortization of
property, plant and equipment [p. 161,
Supplier Relations LLC, 2009]
U.S. Census
Total production overhead
0.14
Corporate Overhead
General and administrative
3,118.1
Retirement for engine manufacturers
(truck manufacturers in brackets)
Health for engine manufacturers (truck
manufacturers in brackets)
0.12
0.01
0.01
Total corporate overhead
Administrative, sales, and marketing costs
(2,992) [p. 161, Supplier Relations LLC,
2009] - Marketing - Transportation -Salaries
(330) [p. 161, Supplier Relations LLC, 2009]
Fringe benefits (433) [p. 161, Supplier
Relations LLC, 2009]
Fringe benefits (433) [p. 161, Supplier
Relations LLC, 2009]
0.15
Selling
Transportation
Marketing
Dealers
Dealer new vehicle net income
Dealer new vehicle selling cost
58.0
145.9
58.6
879.1
0.004
0.01
0.004
0.06
Energy and fuel costs [p. 161, Supplier
Relations LLC, 2009]
LD RPE/IC Study Marketing * 20%, personal
communication with Walter McManus
LD RPE/IC Study, personal communication
with Walter McManus
LD RPE/IC Study, personal communication
with Walter McManus
Total selling and dealer contributors
0.08
Sum of Indirect Costs
Net income
Other costs (not included as
contributors)
0.37
0.05
0.00
5-year average net income [p. 161, Supplier
Relations LLC, 2009]
RPE multiplier
1.42
Sources: Supplier Relations US LLC. December 5, 2009. "Heavy Duty Truck Manufacturing Industry in the U.S.
and its International Trade. NAICS 336120." Irvine, CA: Supplier Relations US LLC.
Personal communication with Walter McManus
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Manufacturing (NAICS 333618) and Heavy Duty Truck Manufacturing (NAICS 336120)
industries to calculate cost contributors for heavy duty engine truck manufacturers, respectively.
The resulting cost contributors equaled 0.01 for engine manufacturers and 0.02 for truck
manufacturers. These calculations are presented in Table A-2.
Table A-2. Calculation of Maintenance, Repair, and Operations Cost Contributors

Heavy Duty Engine
Manufacturers
(NAICS 333618)
Heavy Duty Truck
Manufacturers
(NAICS 336120)
Calculation
Payroll
$2,391,425
$1,335,228
A
Cost of materials
$18,348,214
$15,025,846
B
Manufacturing cost
$20,739,639
$16,361,074
C = A + B
Repair and maintenance
$160,217
$53,442
D
Contract work
$117,910
$206,492
E
Maintenance, repair, operations cost
$278,127
$259,934
F = D + E
Share of manufacturing cost
0.01
0.02
F/C
Source: U.S. Census. 2010. American Factfinder: Sector 31: EC0731I1: Manufacturing: Industry Series: Detailed
Statistics by Industry for the United States: 2007. Washington DC: Department of Commerce.
General and administrative (G&A) costs were calculated by subtracting salaries' cost
(costs of corporate labor) and marketing and transportation cost contributors from the
administrative, sales, and marketing costs provided in the SR LLC report. The SR LLC report
provided fringe benefits' cost ($433 million, or 0.0296 as a share of manufacturing costs
[$14,652 million]) or a sum of health care and retirement costs for manufacturing labor. The
report did not provide a clear breakout for health care and retirement costs. We used a ratio of
health care to retirement costs from Cummins to calculate proxies of these costs for engine
manufacturers and similar ratio from Navistar to calculate proxies of these costs for truck
manufacturers. These calculations are presented in Table A-3.
Neither the SR LLC report nor the U.S. Census provided marketing costs; thus, we used a
proxy from the LD RPE/IC report. However, we believe that heavy duty vehicle manufacturers
spend a lot less on marketing than light duty vehicle manufacturers. The heavy duty trucks
industry engages in business-to-business marketing rather than business-to-consumer marketing.
Our judgment is that business-to-business marketing costs are significantly lower than business-
to-consumer marketing costs, possibly as low as 3 to 5% of business-to-consumer marketing
costs per unit. We defined business-to-business marketing costs as 20% of the
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Table A-3. Calculation of Health Care and Retirement Cost Contributors

Fringe Benefits
Cost

Cost


Share of
Contributors
Heavy Duty
Contributors
Heavy Duty

Manufacturing
(from
Engine
(from
Truck
Cost Contributor
Cost (SP LLC)3
Cummins)b
Manufacturers
PACCAR)'
Manufacturers
Retirement

0.01
0.01
0.03
0.02

0.0296




Health care

0.01
0.02
0.02
0.01
Sources: a Supplier Relations US LLC. December 5, 2009. "Heavy Duty Truck Manufacturing Industry in the
U.S. and its International Trade. NAICS 336120." Irvine, CA: Supplier Relations US LLC.
b Table A-4;c Table A-10.
business-to-consumer marketing costs per unit from Rogozhin et al. (2009) as an upper bound.
Finally, because no data were available to calculate dealer new vehicle net income nor dealer
new vehicle selling cost contributors, we used the LD RPE/IC study contributors as a proxy. The
LD RPE/IC study dealer new vehicle net income and dealer new vehicle selling cost contributors
were based on National Association of Automobile Dealers (NADA) data. For an exact
calculation of these cost contributors, refer to Section A.2 of the LD RPE/IC study.
A.2 Cummins Inc. (Engine Manufacturer)
The general approach to estimate cost contributors to RPE multipliers is presented in
Section 3. This appendix outlines calculations specific to each manufacturer. We performed
several adjustments to numbers presented in the Cummins annual report so they could be applied
to our methodology. Calculations and citations for cost values (referencing pages where specific
cost item is located) that we used in our analysis are outlined in Table A-4.
The Cummins annual report stated that manufacturing cost includes maintenance and
repair costs (valued at $49 million). Therefore, we subtracted that cost from manufacturing cost.
We also added 70% of health care and retirement costs, because these costs are attributable to
manufacturing labor (see Section 3.3 for justification of this assumption).
The Cummins annual report did not clearly provide warranty costs for 2008. Warranty
costs were estimated by subtracting the balance of warranty provisions at the beginning of 2008
from the balance of warranty provisions at the end of 2008. Cummins also did not clearly state
operations costs, which is a large share of the MRO contributor. Therefore, we used the industry
average (calculated using Census data) as a proxy. Calculations of industry averages, which are
based on the data from the industry report by SR LLC and Census, are presented in Section A.l
of this appendix. Cummins' annual report also stated that transportation cost is a part of G&A
costs; thus, the transportation cost contributor was subtracted from the G&A cost contributor.
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Table A-4. Cummins' RPE Multiplier Calculations: 2008


Relative to



Cost of Sales

RPE Multiplier Contributor
Expense
($ Million)
Manufacturing
Cost
Calculation and Source
Vehicle Manufacturing



Manufacturing Cost
11,726.5
1.00
[p. 36, Cummins, 2009] - Maintenance
and repair (49)+70% *( Health care +
retirement)
Production Overhead



Warranty


End of 2008 balance warranty provisions
(962) - Beginning of 2008 Balance
Warranty Provisions (749) [p. 104,

221.0
0.02
Cummins, 2009]
R&D (product development)
422.0
0.04
[p. 24, Cummins, 2009]
Depreciation and amortization
314.0
0.03
[p. 71, Cummins, 2009]
Maintenance, repair, operations cost
152.9
0.01
Census
Total production overhead
1,109.9
0.08

Corporate Overhead



General and administrative
1,404.9
0.12
[p. 27, Cummins, 2009] - Transportation
Retirement
62.4
0.01
0.3 * Retirement ((71) [p. 56, Cummins,
2009] + (102) [p. 58, Cummins, 2009] +
35 [p. 71, Cummins 2009])
Health
142.2
0.01
0.3*Health care [p. 87, Cummins, 2009]
Total corporate overhead
1,609.5
0.14

Selling



Transportation
45.1
0.004
Supplier Relations, LLC
Marketing
120.0
0.01
Warranty and Marketing (341) [p. 87,
Cummins, 2009] - Warranty Cost
Dealers



Dealer new vehicle net income



Dealer new vehicle selling cost



Total selling and dealer



contributors
165.1
0.01

Sum of Indirect Costs

0.23

Net income
755.0
0.06
[p. 27, Cummins, 2009] - Dealer Gross
Other costs (not included as
70.0
0.01

contributors)


[p. 27, Cummins, 2009]
RPE multiplier

1.29

Sources: Supplier Relations LLC (2009); Census (2010) (see references in Section A.l)
Cummins Inc. 2009. 2008 Annual Report on 10-K Form. Available at: http://phx.corporate-
ir.net/phoenix.zhtmI?c=112916&p=irol-reportsannual. Accessed on February 15, 2010.
We made an assumption that corporate labor represents 30% of total labor (total labor
comprised of corporate and manufacturing labor). Thus, 30% of retirement and health care cost
were attributed to retirement and health care cost contributors. Please refer to Section 3.3 for a
A-5

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detailed explanation of this assumption. The Cummins annual report presented retirement costs
by division; thus, retirement costs for the three divisions were added to calculate total retirement
cost (see Table A-4).
Cummins did not provide transportation cost; thus, the industry average (based on the
industry report and Census data) was used as a proxy. Finally, the Cummins annual report did
not separate warranty and marketing costs but reported them as one figure. Therefore, we
subtracted the warranty cost from the warranty and marketing cost to arrive at the marketing cost
contributor. The remaining contributors to the RPE multiplier are shown in Table A-4. Based on
these numbers, the RPE multiplier for Cummins was calculated to be 1.29 in 2008.
Table A-5 provides a sum of the largest indirect cost contributors to RPE for Cummins
from 2002 to 2007. Largest indirect cost contributors were readily available in manufacturers'
annual reports. Funds and timing of the project did not allow performing an extended analysis
(similar to one done for year 2008) for historical data. The values of cost contributors are not
adjusted as in Table A-4but cited as they were reported in annual reports. Table A-5 illustrates
that the sum of the main indirect cost contributors had little variation between 2004 and 2007.
Table A-5. Cummins' Main Indirect Cost Contributors
Indirect Cost Contributor
2007
2006
2005
2004
Cost of sales
1.00
1.00
1.00
1.00
Selling, administrative, and other expenses
0.13
0.12
0.13
0.15
Operating and other expenses
0.04
0.03
0.04
0.04
Depreciation
<0.01
<0.01
<0.01
<0.01
Net income
0.03
0.03
0.03
0.04
Sum of main indirect cost contributors (including net income)
1.26
1.26
1.28
1.29
Sources: Cummins Inc. 2006. 2005 Annual Report on 10-K Form. Available at: http://phx.corporate-
ir.net/phoenix.zhtmI?c=112916&p=irol-reportsannual. Accessed on February 15, 2010.
Cummins Inc. 2009. 2008 Annual Report on 10-K Form. Available at: http://phx.corporate-
ir.net/phoenix.zhtml?c=112916&p=irol-reportsannual. Accessed on February 15, 2010.
A.3 Hino Motor Company (Engine Manufacturer)
Relevant RPE contributing factors gathered from Hino's annual report are presented in
Table A-6. The RPE multiplier calculations are based on 2008 data.
As Table A-6 shows, Hino's manufacturing cost includes 70% of health care and
retirement costs, an assumption covered in Section 3.3 of this report. With the exception of the
A-6

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Table A-6. Hino's RPE Multiplier Calculations: 2008

Expense
Relative to

RPE Multiplier Contributor
(₯ Millions)
Cost of Sales
Calculation and Source
Vehicle Manufacturing



Manufacturing cost
1,137,120
1.00
[p. 1, Hino, 2009b] + 70%



(Retirement)
Production Overhead



Warranty
10,935
0.01
[p. 7, Hino, 2009a]
R&D (product development)
39,547
0.03
[p. 1, Hino, 2009b]
Depreciation and amortization
44,206
0.04
[p. 1, Hino, 2009b]
Maintenance, repair, operations cost
15,730
0.01
Census
Total production overhead
110,418
0.10

Corporate Overhead



General and administrative
99,066
0.09
General and Administrative



(149,769) [p. 7, Hino, 2009a] -



Retirement [p. 7, Hino, 2009a] -



Transportation [p. 7, Hino, 2009a]



- Advertising [p. 7, Hino, 2009a]



- Health care
Retirement
11,555
0.01
Supplier Relations, LLC
Health
23,109
0.02
Supplier Relations, LLC
Total corporate overhead
133,730
0.12

Selling



Transportation
12,158
0.01
[p. 7, Hino, 2009a]
Marketing
3,879
0.003
Advertising [p. 7, Hino, 2009a]
Dealers



Dealer new vehicle net income



Dealer new vehicle selling cost



Total selling and dealer contributors
16,037
0.01

Sum of Indirect Costs
260,185
0.23

Net income
22,178
0.02
[p. 7, Hino, 2009a]
Other costs (not included as
10,602
0.01
Total nonoperating expenses [p. 7,
contributors)


Hino, 2009a]
RPE multiplier
1,419,483
1.25

Sources: Supplier Relations LLC (2009); Census (2010) (see references in Section A.l)
Hino Motors, Ltd. and Consolidated Subsidiaries, 2009a. Hino: Financial Results of the Fiscal Year Ended March
31,2009.
Hino Motors, Ltd. and Consolidated Subsidiaries, 2009b. Hino: Five-year Summary Ended March 31, 2009.
MRO costs, values for production overhead were reported from Hino's financial
statements. Because Hino did not report MRO costs, an industry average (based on Census data)
was used as a proxy. Hino's G&A expense included retirement, health care, transportation, and
advertising. These costs have been subtracted from the G&A cost reported by Hino. Hino did not
report health care and retirement costs, so we used an industry average as a proxy (based on data
A-7

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from SR LLC report; see Section A.l for a detailed calculation). Hino's remaining contributors
to the RPE multiplier are shown in Table A-6. Based on these figures, Hino's RPE for 2008 was
1.25.
Hino's sum of the main indirect cost contributors remained relatively flat from 2004 to
2007. The sum of the main indirect cost contributors varied between 1.21 and 1.25 in the 2004 to
2007 time period (Table A-7).
Table A-7. Hino's Main Indirect Cost Contributors
Indirect Cost Contributor
2007
2006
2005
2004
Cost of sales
1.00
1.00
1.00
1.00
Selling, administrative, and other expenses
0.13
0.13
0.13
0.14
Operating and other expenses
NA
NA
NA
NA
Depreciation
0.03
0.03
0.03
0.03
Net income
0.02
0.03
0.02
0.04
Sum of main indirect cost contributors (including net income) 1.22
1.23
1.21
1.25
Sources: Hino Motors, Ltd. and Consolidated Subsidiaries, 2009b. Hino: Five-year Summary Ended
March 31, 2009.
A.4 PACCAR (Heavy Duty Truck Manufacturer)
Relevant RPE contributing factors gathered from PACCAR's annual report are presented
in Table A-8. PACCAR included "transportation expense" in its cost of sales, representing
approximately 0.4% of the cost of sales. We subtracted this line item, $46.5 million (see Table
A-8), from the cost of sales to arrive at an adjusted value for the manufacturing cost of $11.5
billion. PACCAR's reported G&A cost included transportation ($46.5) and marketing costs
($115 million), which were subtracted from G&A to arrive at an adjusted cost contributor of
$308.7 million. Marketing costs were not reported by PACCAR, so an industry average of 0.01
was used as a proxy. Also, PACCAR did not directly report transportation costs, which were
assumed to be an industry average based on SR LLC data (see Section A. 1 for these
calculations).
PACCAR did not report MRO costs; therefore, we used an industry average of 0.02
(based on the Census data) as a proxy. Results of these calculations are presented in Table A-8.
A-8

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Table A-8. PACCAR RPE Multiplier Calculations: 2008
RPE Multiplier Contributor
Expense
($ Million)
Relative to
Cost of Sales
Calculation and Source
Vehicle Manufacturing
Manufacturing cost
Production Overhead
Warranty
R&D (product development)
11,550
304.6
341.8
1.00
0.03
0.03
Cost of sales - transportation expense (0.4%)
[Walter McManus, personal communication]
[p. 40, PACCAR, 2008]
[p. 31, PACCAR, 2008]
Depreciation and amortization
649.4
0.06
[p. 49, PACCAR, 2008]
Maintenance, repair, operations
cost
186.5
0.02
Census
Total production overhead
1,482.3
0.13
Corporate Overhead
General and administrative
Retirement
Health
308.7
118.7
12.0
0.03	General & administrative (470.2) [p. 24, PACCAR,
2008] - Transportation (46.5) - Marketing (115.0)
0.01	Benefits paid (48.8) [p. 42 of PACCAR Annual
Report 2008] + Employer contributions (69.9) [p.
42 of PACCAR Annual Report 2008]
0.001	Benefits paid (4.1) [p. 43, PACCAR, 2009] +
Service cost (3.2) [p. 43, PACCAR, 2009] +
Interest cost (4.7) [p. 43, PACCAR, 2009]
Total corporate overhead
439.4
0.04
Selling
Transportation
Marketing
Dealers
Dealer new vehicle net income
Dealer new vehicle selling cost
46.5
115.0
46.2
693.0
0.004
0.01
0.004
0.06
Supplier Relations, LLC
20% * [Marketing cost from LD Study] (Walter
McManus, personal communication)
Walter McManus, personal communication
Walter McManus, personal communication
Total selling and dealer
contributors
900.7
0.08
Sum of Indirect Costs
Net income
Other costs (not included as
contributors)
1,921.7
1,017.9
1.1
0.24
0.09
<0.001
[p. 1, PACCAR, 2008]
[p. 34, PACCAR, 2008]
RPE multiplier
1.33
Sources: Supplier Relations LLC (2009); Census (2010) (see references in Section A.l)
PACCAR, 2008. PACCAR: Annual Report 2008. Available at: http://www.paccar.com/investors/
investor_resources_history.asp. Accessed on February 7, 2010.
Walter McManus, personal communication on February 16, 2010.
A-9

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As mentioned in Section 3.3 of this report, health care and retirement costs include
expenditures for manufacturing and corporate workers. PACCAR's annual report provided
figures for retirement costs in two categories: "benefits paid" of $48.8 million and "employer
contributions" of $69.9 million in 2008. These two costs were summed, totaling $118.7 million
for our retirement cost contributor. As with retirement, PACCAR disaggregated 2008 health care
costs into several categories: "benefits paid" of $4.1 million, "service cost" of $3.2 million, and
"interest cost" of $4.7. These costs were summed together, bringing the health care cost
contributor to a total of $12.0 million. The industry average values of 0.004 and 0.06 were used
for dealer new vehicle net income and dealer new vehicle selling cost contributors. As a result,
the value of the RPE multiplier for PACCAR was 1.33 in 2008.
Table A-9 presents PACCAR's sum of the main indirect cost contributors for years prior
to 2008. The sum of the main indirect cost contributors for earlier years was lower than the RPE
multiplier value derived for 2008; however, the main cost contributors reported in Table A-9
range within 0.02 from cost contributors reported in Table A-8.
Table A-9. PACCAR Main Indirect Cost Contributors
Indirect Cost Contributor
2007
2006
2005
2004
Cost of sales
1.00
1.00
1.00
1.00
Selling, administrative, and other expenses
0.04
0.04
0.04
0.04
Operating and other expenses
NA
NA
NA
NA
Depreciation
0.04
0.03
0.03
0.03
Net income
0.10
0.11
0.10
0.10
Sum of main indirect cost contributors (including net income)
1.21
1.20
1.18
1.19
Sources: PACCAR, 2006. PACCAR: Annual Report 2005. Available at: http://www.paccar.com/
investors/investor_resources_history.asp. Accessed on February 7, 2010.
PACCAR, 2009. PACCAR: Annual Report 2008. Available at: http://www.paccar.com/
investors/investor_resources_history.asp. Accessed on February 7, 2010.
A.5 Navistar (Heavy Duty Truck Manufacturer)
Table A-10 presents relevant RPE cost contributors and the RPE multiplier for Navistar
in 2008. Navistar allocates a portion of "postretirement benefit expense" in its cost of sales
reporting. Thus, we subtracted this cost ($33 million) from the cost of sales to arrive at an
adjusted manufacturing cost of $11,849 million. Navistar also allocates a portion of
A-10

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Table A-10. Navistar RPE Multiplier Calculations: 2008
RPE Multiplier
Contributor
Expense
($ Millions)
Relative to
Cost of Sales
Calculation and Source
Vehicle Manufacturing



Manufacturing cost
11,849.4
1.00
Cost of sales [p. 23, Navistar, 2008] - Truck
postretirement benefit expense allocated to
costs of products sold (22) [p. 42, Navistar,
2008] - Engine postretirement benefit
expense allocated to costs of products sold
(11) [p. 45, Navistar, 2008]
Production Overhead



Warranty
257.0
0.02
[p. 24, Navistar, 2008]
R&D (product
development)
384.0
0.03
[p. E-28, Navistar, 2008]
Depreciation and
393.0
0.03

amortization


[p. 72, Navistar, 2008]
Maintenance, repair,
358.0
0.03

operations cost


[p. E-28, Navistar, 2008]
Total production overhead
1,392.0
0.12

Corporate Overhead



General and administrative
1,389.8
0.12
[p. E-28, Navistar, 2008] - Postretirement
benefits expense allocated to selling, general
and administrative expenses (6) [p. 43,
Navistar, 2008] - Transportation (47.2)
[Supplier Relations, LLC]
Retirement
355.0
0.03
[p. 116, Navistar, 2008]
Health
209.0
0.02
[p. 116, Navistar, 2009]
Total corporate overhead
1,953.8
0.16

Selling



Transportation
47.2
0.004
Supplier Relations, LLC
Marketing
24.0
0.00
[p. 83, Navistar, 2008]
Dealers



Dealer new vehicle net
47.4
0.004
Walter McManus, personal communication
income



Dealer new vehicle selling
711.0
0.06
Walter McManus, personal communication
cost



Total selling and dealer
829.6
0.07
[p. 25, Navistar, 2008]
contributors



Sum of Indirect Costs
4,175.4
0.35

Net income
134.0
0.01
[p. 23, Navistar, 2008]
Other costs (not included
14.0
0.001
[p. 26, Navistar, 2008]
as contributors)



RPE multiplier

1.36

Sources: Supplier Relations LLC (2009) (see references in Section A.l)
Navistar, 2008. Annual Report 2008. Available at: http://ir.navistar.com/sec.cfm. Accessed February 7,
2010.
Walter McManus, personal communication on February 16, 2010.
A-ll

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"postretirement benefit expense" ($6 million) to G&A cost. Thus, we subtracted this expense
from G&A. As with all the heavy duty truck manufacturers, we assumed the transportation cost
($47.2 million) was 0.4% of manufacturing costs (SR LLC). Based on the light duty vehicle
study and personal communications with Walter McManus (February 16, 2010), we imputed a
dealer cost of $758 million. Navistar's RPE multiplier value was calculated to be 1.36 for 2008.
Navistar's annual reports were available dating back to 2004. Similar to PACCAR,
Navistar's sum of the main indirect cost contributors from 2004 to 2007 is lower than the RPE
derived for 2008 (see Table A-l 1). However, the main cost contributors reported in Table A-9
range within 0.03 of cost contributors reported in Table A-8.
Table A-ll. Navistar Main Indirect Cost Contributors (as a Share of Cost of Sales)
Indirect Cost Contributor
2007
2006
2005
2004
Cost of sales
1.00
1.00
1.00
1.00
Selling, administrative, and other expenses
0.14
0.11
0.10
0.11
Operating and other expenses
<0.01
<0.01
<0.01
<0.01
Depreciation
0.04
0.03
0.03
0.03
Net income
-0.01
0.03
0.01
-0.01
Sum of main indirect cost contributors (including net income) 1.21
1.21
1.19
1.18
Sources: Navistar, 2005. Annual Report 2005. Available at: http://ir.navistar.com/sec.cfm. Accessed February 7,
2010.
Navistar, 2008. Annual Report 2008. Available at: http://ir.navistar.com/sec.cfm. Accessed February 7,
2010.
A.6 Daimler (Heavy Duty Truck Manufacturer)
Relevant RPE contributing factors gathered from Daimler's annual report are presented
in Table A-12. As with Volvo, Daimler has several operating divisions, one of which is exclusive
to the manufacturing of heavy duty diesel trucks. The following reporting of cost contributors is
based on Daimler's truck division. Daimler's annual report did not provide an estimate of MRO
cost; therefore, the industry average (based on Census data) was used as a proxy (see
Table A-12). In congruence with the other manufacturers that did not directly report health care
cost, we assumed manufacturing cost would reflect the industry average of 70% of health care
cost (see Table A-12). Warranty costs were reported as containing a portion of pension (€15
million) and health care costs (€3.2 million), and these two costs were subtracted to arrive at an
adjusted warranty cost contributor of €953.7 million.
A-12

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Table A-12. Daimler (Truck) RPE Multiplier Calculations: 2008
RPE Multiplier Contributor
Expense
(€ Millions)
Relative to
Cost of Sales
Calculation and Source
Vehicle Manufacturing
Manufacturing cost
Production Overhead
Warranty
R&D (product development)
Depreciation and amortization
Maintenance, repair, operations
cost
22,345.9
953.7
1,056.0
646.0
355.0
1.00	Cost of sales [p. 207, Daimler, 2008] + (70% *
Health care)
0.04	[p. 73, Daimler, 2008] (Warranty, pensions, and
Health care lumped together (18.2) - Pensions
provisions (15.0))*Adjustment factor from
Daimler Group to Daimler Trucks
0.05	[p. 62, Daimler, 2008]
0.03	[p. 207, Daimler, 2008]
0.02	Census
Total production overhead
3,010.7
0.13
Corporate Overhead
General and administrative
Retirement
Health
655.4
236.0
261.8
0.03
0.01
0.01
[p. 144, Daimler, 2008] ( General &
administrative for Daimler Group was reported as
4,124) - Health care - Transportation -
Marketing
30% * [p. 53, Daimler, 2008]
Supplier Relations, LLC
Total corporate overhead
1,153.2
0.05
Selling
Transportation
Marketing
Dealers
Dealer new vehicle net income
Dealer new vehicle selling cost
87.7
222.6
89.4
1,340.8
0.004 Supplier Relations, LLC
0.01	20% * [Marketing cost from LD Study] (Walter
McManus, personal communication)
0.004 Walter McManus, personal communication
0.06	Walter McManus, personal communication
Total selling and dealer
contributors
1,740.4
0.08
Sum of Indirect Costs
Net income
Other costs (not included as
contributors)
5,904.2
1,607.0
0.26
0.07
0
[p. 207, Daimler, 2008]
RPE multiplier
1.34
Sources: Supplier Relations LLC (2009); Census (2010) (see references in Section A.l)
Daimler, 2008. Annual Report 2008. Available at: http://www.daimler.com/investor-relations/reports-and-
key-figures/annual-documents/daimler-ag. Accessed February 7, 2010.
Walter McManus, personal communication on February 16, 2010.
A-13

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Daimler (truck) did not directly report G&A expenses. Our methodology for determining
G&A for Daimler (truck) was based on an imputed ratio of Daimler Group's G&A expense to
Daimler Group's cost of sales (see Table A-12). G&A costs were reported to contain health care
costs and transportation costs, both of which were subtracted from the imputed G&A cost to
arrive at an adjusted G&A cost contributor for Daimler's truck division. Selling expenses
(transportation, marketing, dealer support, and dealer discount) were reported as an industry
average based on information from SR LLC and personal communication with Walter
McManus. Daimler also did not provide an estimate of health care cost, so we calculated the
health care cost contributor based on an industry average (SR LLC). Daimler's (truck) RPE
multiplier value was calculated to be 1.34 in 2008.
Daimler experienced mild variation in its sum of main indirect cost contributors (see
Table A-13). Between 2005 and 2007, the sum of main indirect cost contributors varied between
1.33 and 1.42.
Table A-13. Daimler Main Indirect Cost Contributors
Indirect Cost Contributor
2007
2006
2005
Cost of sales
1.00
1.00
1.00
Selling, administrative, and other expenses
0.17
0.17
0.17
Operating and other expenses
<0.01
0.01
0.00
Depreciation
0.11
0.16
0.16
Net income
0.05
0.05
—
Sum of main indirect cost contributors (including net income)
1.37
1.42
1.33
Sources: Daimler, 2006. Annual Report 2006. Available at: http://www.daimler.com/investor-relations/reports-and-key-
figures/annual-documents/daimler-ag. Accessed February 7, 2010.
Daimler, 2008. Annual Report 2008. Available at: http://www.daimler.com/investor-relations/reports-and-key-
figures/annual-documents/daimler-ag. Accessed February 7, 2010.
A.7 Volvo (Heavy Duty Truck Manufacturer)
RPE calculations for Volvo's truck division are presented in Table A-14. Volvo's annual
report segregated its financials among six operating divisions, one of which was the heavy duty
diesel truck division. In 2008, Volvo's (truck) manufacturing cost equaled SEK 231,435. Volvo
(truck) did not report transportation, marketing, or dealer costs; therefore, imputed values from
SR LLC and personal communications with Walter McManus were used as proxies. G&A costs
were reported for Volvo (truck) and included transportation and marketing costs; these costs
A-14

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Table A-14. Volvo (Truck) RPE Multiplier Calculations: 2008
RPE Multiplier Contributor
Expense
(SEK
Millions)
Relative to Cost
of Sales
Calculation and Source
Vehicle Manufacturing
Manufacturing cost
231,435.5
1.00
[p. 75, Volvo, 2008]
Production Overhead



Warranty
10,354.0
0.04
[p. 86, Volvo, 2008]
R&D (product development)
14,348.0
0.06
[p. 75, Volvo, 2008]
Depreciation and amortization
13,524.0
0.06
[p. 78, Volvo, 2008]
Maintenance, repair, operations
cost
1,915.0
0.01
[p. 78, Volvo, 2009]
Total production overhead
40,141.0
0.17

Corporate Overhead



General and administrative
Retirement
28,518.4
1,365.0
0.12
0.01
Administrative expenses and selling expenses
(31,763.9) [p. 75, Volvo, 2008] -
Transportation (940.5) - Marketing (2,301.1)
Health
847.2
0.004
30% * [p. 106, Volvo, 2008]
Total corporate overhead
30,730.6
0.13

Selling



Transportation
940.5
0.004
30% * [p. 106, Volvo, 2008]
Marketing
Dealers
2,305.1
0.01
20% * [Marketing cost from LD Study]
(Walter McManus, personal communication)
Dealer new vehicle net income
925.7
0.004
Walter McManus, personal communication
Dealer new vehicle selling cost
13,886.1
0.06
Walter McManus, personal communication
Total selling and dealer
contributors
18,057.4
0.08

Sum of Indirect Costs

0.38

Net income
10,016.0
0.04
[p. 93, Volvo, 2008]
Other costs (not included as
contributors)
1,802.0
0.01
Dealer bonus [p.109, Volvo, 2008]
RPE multiplier
1.43
Sources: Supplier Relations LLC (2009); Census (2010) (see references in Section A.l)
Volvo Group, 2008. Annual Report 2008. Available at: http://www.volvogroup.eom/GROUP/GLOBAL/EN-
GB/INVESTORS/Pages/investor_relations.aspx. Accessed February 7, 2010.
Walter McManus, personal communication on February 16, 2010.
A-15

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were subtracted to determine G&A (see Table A-12). The RPE multiplier for Volvo (truck)
equaled 1.43 in 2008.
Table A-15 presents Volvo's sum of the main indirect cost contributors, which are again
lower than the RPE value derived above for 2008.
Table A-15. Volvo Main Indirect Cost Contributors
Indirect Cost Contributor
2007
2006
2005
2004
Cost of sales
1.00
1.00
1.00
1.00
Selling, administrative, and other expenses
0.15
0.14
0.14
0.15
Operating and other expenses
<0.01
<0.01
<0.01
<0.01
Depreciation
0.06
0.06
0.05
0.06
Net income
0.07
0.08
0.07
0.06
Sum of main indirect cost contributors (including net income)
1.33
1.33
1.31
1.32
Sources: Volvo Group, 2006. Annual Report 2006. Available at: http://www.volvogroup.com/GROUP/
GLOBAL/EN-GB/INVESTORS/Pages/investor_relations.aspx. Accessed on February 7, 2010.
Volvo Group, 2008. Annual Report 2008. Available at: http://www.volvogroup.com/GROUP/
GLOBAL/EN-GB/INVESTORS/Pages/investor_relations.aspx. Accessed on February 7, 2010.
A-16

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