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, MI 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, MI 48109

RTI Project Number 0211577.003.002
_________________________________

RTI International is a trade name of Research Triangle Institute.

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, MI 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, MI 48109
iii

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
iv

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-1

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
v

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
1-1

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 revenues1to 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
1-2

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 
1-3

findings and our conclusions, and Appendix A outlines detailed calculations of the RPE 

multipliers for individual manufacturers.
2-1

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.
3-1

SECTION 3

RPE MULTIPLIER

The RPE multiplier is a ratio that relates direct costs, indirect costs, and net income1to 

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) 1

Direct Cost

(Direct Cost Indirect Cost Net Income) RPE Multiplier 

 

 



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.
3-2

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).
3-3

Table 3-2. RPE Multiplier Cost Contributors

Contributor Description

Manufacturing (Direct Cost)

Manufacturing cost Cost of materials and labor cost

Production Overhead (Indirect Cost)

Warranty Cost of providing product warranty

R&D (research and development) Cost of developing and engineering the product

Depreciation and amortization Cost related to depreciation and amortization of manufacturing 

facilities and equipment

Maintenance, repair, operations cost Costs related to maintenance, repair, and operations of manufacturing 

facilities and equipment

Corporate Overhead (Indirect Cost)

General and administrative (G&A) Costs related to salaries of nonmanufacturing labor, operations of 

corporate office, etc.

Retirement Cost of pension for nonmanufacturing labor

Health care Costs of health care for nonmanufacturing labor

Selling (Indirect Cost)

Transportation Costs related to transporting manufactured goods 

Marketing Costs related to advertising of the manufactured goods (manufacturer 

costs).

Dealer (Indirect Cost)

Dealer new vehicle net income Net income to dealers from sales of new vehicles

Dealer new vehicle selling expense Costs related to sales of the new vehicles by dealers (dealer costs).

Net Income 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 
3-4

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.1 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
3-5

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)
3-6

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
3-7

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 businessto-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-toconsumer 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. 
3-8

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).4Individual 

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.
3-9

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 industryweighted 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.corporateir.net/phoenix.zhtml?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.
4-1

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).
4-2

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

Cost Contributor

Heavy Duty Engine 

Manufacturers

Heavy Duty Truck 

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).
4-3

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.
4-4

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

Health care 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
4-5

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 0.361 1.386 2.289

R&D 0.822 1.481 3.732

Depreciation and amortization 0.373 0.585 1.444

Maintenance, repair, operations 0.488 0.712 1.396

Corporate Overhead

General and administrative 0.339 0.579 1.057

Retirement 0.385 0.412 0.565

Health care 0.346 0.408 0.635

Selling

Transportation 0.436 0.143 0.829

Marketing 0.215 0.821 1.511

Dealer new vehicle selling expense 0.250 0.626 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 0.168 0.964 1.518

R&D 0.372 0.901 2.018

Depreciation and amortization 0.281 0.466 0.951

Maintenance, repair, operations 0.377 0.451 1.092

Corporate Overhead

General and administrative 0.286 0.425 0.671

Retirement 0.385 0.393 0.524

Health care 0.331 0.354 0.516

Selling

Transportation 0.393 0.143 0.604

Marketing 0.207 0.569 0.829

Dealer new vehicle selling expense 0.229 0.426 0.694

 

2

For a detailed discussion of the development of these factors, refer to Helfand and Sherwood (2009).
4-6

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.
4-7

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.
4-8

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

RPE and IC 

Multiplier 

Contributors

RPE 

Multiplier 

Approach IC Multiplier Approach

Weighted 

Average 

Industry 

Indirect 

Cost 

Contributors to 

RPE

Short-Term Effects Long-Term Effects

LowComplexity

Technology 

MediumComplexity

Technology

HighComplexity 

Technology 1

HighComplexity 

Technology 2

LowComplexity

Technology

MediumComplexity

Technology

HighComplexity 

Technology 1

HighComplexity

Technology 2

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

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)

0.04 0.51 0.02 1.29 0.05 2.00 0.07 3.73 0.13 0.19 0.01 0.45 0.02 0.30 0.01 2.02 0.07

Depreciation 

and 

amortization

0.03 0.19 0.01 0.29 0.01 1.00 0.03 1.44 0.04 0.14 <0.01 0.23 0.01 1.00 0.03 0.95 0.03

Maintenance, 

repair, 

operations 

cost

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

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 

administrative

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)
4-9

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

RPE and IC 

Multiplier 

Contributors

RPE 

Multiplier 

Approach IC Multiplier Approach

Weighted 

Average 

Industry 

Indirect 

Cost 

Contributors to 

RPE

Short-Term Effects Long-Term Effects

LowComplexity 

Technology 

MediumComplexity 

Technology

HighComplexity 

Technology 1

HighComplexity 

Technology 2

LowComplexity 

Technology 

MediumComplexity 

Technology

HighComplexity 

Technology 1

HighComplexity 

Technology 2

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multi

-plier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

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
4-10

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

RPE and IC 

Multiplier 

Contributors

RPE 

Multiplier 

Approach IC Multiplier Approach

Weighted 

Average 

Industry 

Indirect 

Cost 

Contributors to 

RPE

Short-Term Effects Long-Term Effects

LowComplexity 

Technology 

MediumComplexity 

Technology

HighComplexity 

Technology 1

HighComplexity 

Technology 2

LowComplexity 

Technology 

MediumComplexity 

Technology

HighComplexity 

Technology 1

HighComplexity 

Technology 2

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment

Factor

IC 

Multi

-plier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Manufacturing

Manufacturing 

Cost

1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Production 

overhead

Warranty 0.04 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 

development)

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

Depreciation 

and 

amortization

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

Maintenance, 

repair, 

operations 

cost

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

Total 

production 

overhead

0.14 0.06 0.13 0.22 0.33 0.03 0.07 0.11 0.20

Corporate 

Overhead

General and 

administrative

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

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 

overhead

0.09 0.02 0.03 0.05 0.09 0.01 0.02 0.05 0.06

(continued)
4-11

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

RPE and IC 

Multiplier 

Contributors

RPE 

Multiplier 

Approach IC Multiplier Approach

Weighted 

Average 

Industry 

Indirect 

Cost 

Contributors to 

RPE

Short-Term Effects Long-Term Effects

LowComplexity 

Technology 

MediumComplexity 

Technology

HighComplexity 

Technology 1

HighComplexity 

Technology 2

LowComplexity 

Technology 

MediumComplexity 

Technology

HighComplexity 

Technology 1

HighComplexity 

Technology 2

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multi

-plier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

Adjustment 

Factor

IC 

Multiplier

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 

income

0.00

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
4-12

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
5-1

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 lowcomplexity 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.
5-2

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. Longterm multipliers for High 2 technology complexity equaled 1.24 for engine manufacturers and 

1.31 for truck manufacturers.
6-1

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 Q1 and buyers purchase that quantity at the price of 

P1 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.
6-2

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 Q1, 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 S0

and S1, the price axis, and quantity Q1. The actual social cost is the area between lines S0 and S1, 

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 Q1 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 

Price

Quantity

S1: With Regulation

D

Q2

P2

P3

Q1

S0: Without Regulation

P1 A

B

C

Q3
6-3

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.
7-1

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.
8-1

SECTION 8

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Management Accounting 69(10):20-7.

Cummins Inc. 2006. 2005 Annual Report on 10-K Form. Available at: http://phx.corporateir.net/phoenix.zhtml?c=112916&p=irol-reportsannual. Accessed on February 15, 2010.

Cummins Inc. 2009. 2008 Annual Report on 10-K Form. Available at: http://phx.corporateir.net/phoenix.zhtml?c=112916&p=irol-reportsannual. Accessed on February 15, 2010.

Daimler. 2006. Annual Report 2006. Available at: http://www.daimler.com/investorrelations/reports-and-key-figures/annual-documents/daimler-ag. Accessed February 7, 

2010.

Daimler. 2008. Annual Report 2008. Available at: http://www.daimler.com/investorrelations/reports-and-key-figures/annual-documents/daimler-ag. Accessed February 7, 

2010.

Detroit Diesel Corporation. 2010. Detroit Diesel: DD 15. Detroit, MI: Detroit Diesel 

Corporation. Available at: http://www.detroitdiesel.com /pdf/engines/2009-dd15-

brochure.pdf. Accessed on March 30, 2010.

Forbes Inc. 2010. Investopedia. Cost of Goods Sold—COGS. Available at: 

http://www.investopedia.com/terms/c/cogs.asp>. Accessed on March 22, 2010.

Helfand, G., and T. Sherwood. 2009. “Memorandum: Documentation of the Development of 

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of Transportation and Air Quality, U.S. Environmental Protection Agency.

Henderson, R.M., and K.B. Clark. 1990. “Architectural Innovation: The Reconfiguration of 

Existing Product Technologies and the Failure of Established Firms.” Administrative 

Science Quarterly 35(1):9-30.

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.

IBIS. January 2010, IBISWorld Industry Report 33612: Truck & Bus Manufacturing in the US. 

CA: IBIS.

IHS Global Insight. September 14, 2009. HIS Global Insight Report: Daimler Trucks 

(Automotive). Waltham, MA: IHS Global Insight.
8-2

IHS Global Insight. September 18, 2009. HIS Global Insight Report: Navistar (Automotive). 

Waltham, MA: IHS Global Insight.

IHS Global Insight. September 18, 2009. HIS Global Insight Report: Volvo Trucks 

(Automotive). Waltham, MA: IHS Global Insight.

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.

Jack Faucett Associates. September 4, 1985. Update of EPA’s Motor Vehicle Emission Control 

Equipment Retail Price Equivalent (RPE) Calculation Formula. Chevy Chase, MD: Jack 

Faucett Associates.

McKinsey & Company. October 2003. “Preface to the Auto Sector Cases.” In New Horizons: 

Multinational Company Investment in Developing Economies. San Francisco, CA: 

McKinsey & Company.

McManus, Walter. Personal communication on February 16, 2010.

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Passenger Cars and Light-Duty Trucks. Washington, DC: National Research Council. 

Available at: http://books.nap.edu/openbook.php?isbn =0309076013. Accessed on 

December 8, 2008.

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.

Niazi, A., J. Dai, S. Balabani, and L. Seneviratne. 2007. “A New Overhead Estimation 

Methodology: A Case Study in an Electrical Engineering Company.” Proceedings of the 

Institution of Mechanical Engineers, Part B: Journal of Engineering Manufacture

221(4):699-710.

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.
8-3

Ricardo, Inc. June 2008. A Study of Potential Effectiveness of Carbon Dioxide Reducing Vehicle 

Technologies, Revised Final Report. EPA420-R-08-004a. Washington, DC: 

Environmental Protection Agency. Available at:

http://www.epa.gov/oms/technology/420r08004a.pdf. Accessed on February 17, 2009.

Rogozhin, A., M. Gallaher, and W. McManus. February 2009. Automobile Industry Retail Price 

Equivalent and Indirect Cost Multipliers. EPA-420-R-09-003. Washington, DC: 

Environmental Protection Agency. Available at: http://www. epa.gov/otaq/ldhwy/420r09003.pdf.

Rogozhin, A., M. Gallaher, G. Helfand, and W. McManus. 2010. “Using Indirect Cost 

Multipliers to Estimate the Total Cost of Adding New Technology in the Automobile 

Industry.” International Journal of Production Economics 124(2):360-368.

Scania Group. 2010. “Scania Turbocompound: Turbocompounding Converts Excess Energy Into 

Power.” Available at: http://www.scania.com/products-services/trucks/maincomponents/engines/engine-technology/turbocompound/index.aspx. Accessed on March 

30, 2010.

Sierra Research, Inc. November 21, 2007. Study of Industry—Average Mark-Up Factors Used to 

Estimate Changes in Retail Price Equivalent (RPE) for Automotive Fuel Economy and 

Emissions Control Systems. Sacramento, CA: Sierra Research, Inc.

Son, Y.K. 1991. “A Cost Estimation Model for Advanced Manufacturing Systems.”

International Journal of Production Research 29(3):441-52.

Spinney, B., B. Faigin, N. Bowie, and S. Kratzke. 1998. Advanced Air Bag Systems Cost, 

Weight, and Lead Time Analysis. Summary Report. Contract No. DTNH22-96-0-12003. 

Washington, DC: Department of Transportation.

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.

U.S. Department of Commerce, Bureau of Census (Census). 2009. American Factfinder: Sector 

31: EC0731I1: Manufacturing: Industry Series: Detailed Statistics by Industry for the 

United States: 2007. Washington, DC: Department of Commerce.

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.

U.S. Environmental Protection Agency (EPA). 2004. Final Regulatory Analysis: Control of 

Emissions from Nonroad Diesel Engines. EPA420-R-04-007. Ann Arbor, MI: 

Environmental Protection Agency. Available at: http://www.epa.gov/nonroaddiesel/2004fr/420r04007.pdf. 
8-4

U.S. Environmental Protection Agency (EPA). 2005. “Effect of Single Wide Tires and Trailer 

Aerodynamics on Fuel Economy and NOx Emissions of Class 8 Line-Haul TractorTrailers.” Paper number 05CV-45. Available at: http://epa.gov/smartway/documents/sae05cv045-110105.pdf. Accessed on March 30, 2010.

U.S. Environmental Protection Agency (EPA). 2008. Regulatory Impact Analysis: Control of 

Emissions of Air Pollution from Locomotive Engines and Marine Compression Ignition 

Engines Less than 30 Liters per Cylinder. EPA420-R-08-001a. Ann Arbor, MI: 

Environmental Protection Agency. Available at: http://www.epa.gov/ 

otaq/regs/nonroad/420r08001a.pdf. 

U.S. Internal Revenue Service (IRS). August 11, 2008. “Amortization of R&D Expenditures.”

Washington, DC: Internal Revenue Service. Available at:

http://www.irs.gov/businesses/small/industries/article/0,,id=97642,00.html. Accessed on 

August 20, 2009. 

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.

Vyas, A., D. Santini, and R. Cuenca. April 2000. Comparison of Indirect Cost Multipliers for 

Manufacturing. Argonne, IL: Center for Transportation Research, Energy Systems 

Division, Argonne National Laboratory.
A-1

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.1: 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.1 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-1. 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-2

Table A-1. 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 1.00 Cost of materials (13,896) [p. 161, Supplier 

Relations LLC, 2009] + Wages (756) [p. 161, 

Supplier Relations LLC, 2009]

Production Overhead

Warranty 0.03 LD RPE/IC Study (only used to break out 

G&A)

R&D (product development) 0.05 LD RPE/IC Study (only used to break out 

G&A)

Depreciation and amortization 692.0 0.05 Depreciation, depletion, and amortization of 

property, plant and equipment [p. 161, 

Supplier Relations LLC, 2009]

Maintenance, repair, operations cost for 

engine manufacturers (truck 

manufactures in brackets)

232.8 0.02 U.S. Census

Total production overhead 0.14

Corporate Overhead

General and administrative 3,118.1 0.12 Administrative, sales, and marketing costs 

(2,992) [p. 161, Supplier Relations LLC, 

2009] − Marketing − Transportation -Salaries 

(330) [p. 161, Supplier Relations LLC, 2009]

Retirement for engine manufacturers 

(truck manufacturers in brackets)

0.01 Fringe benefits (433) [p. 161, Supplier 

Relations LLC, 2009] 

Health for engine manufacturers (truck 

manufacturers in brackets)

0.01 Fringe benefits (433) [p. 161, Supplier 

Relations LLC, 2009] 

Total corporate overhead 0.15

Selling

Transportation 58.0 0.004 Energy and fuel costs [p. 161, Supplier 

Relations LLC, 2009]

Marketing 145.9 0.01 LD RPE/IC Study Marketing * 20%, personal 

communication with Walter McManus

Dealers

Dealer new vehicle net income 58.6 0.004 LD RPE/IC Study, personal communication 

with Walter McManus

Dealer new vehicle selling cost 879.1 0.06 LD RPE/IC Study, personal communication 

with Walter McManus

Total selling and dealer contributors 0.08

Sum of Indirect Costs 0.37

Net income 0.05 5-year average net income [p. 161, Supplier 

Relations LLC, 2009]

Other costs (not included as 

contributors)

0.00

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
A-3

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 businessto-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 
A-4

Table A-3. Calculation of Health Care and Retirement Cost Contributors

Cost Contributor

Fringe Benefits 

Share of 

Manufacturing 

Cost (SP LLC)a

Cost 

Contributors 

(from

Cummins)b

Heavy Duty 

Engine 

Manufacturers

Cost 

Contributors 

(from

PACCAR)c

Heavy Duty 

Truck 

Manufacturers

Retirement

0.0296

0.01 0.01 0.03 0.02

Health care 0.01 0.02 0.02 0.01

Sources: aSupplier 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.1 

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.
A-5

Table A-4. Cummins’ RPE Multiplier Calculations: 2008

RPE Multiplier Contributor

Expense

($ Million)

Relative to 

Cost of Sales

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

221.0 0.02

End of 2008 balance warranty provisions 

(962) − Beginning of 2008 Balance 

Warranty Provisions (749) [p. 104, 

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 

contributors)

70.0 0.01

[p. 27, Cummins, 2009]

RPE multiplier 1.29

Sources: Supplier Relations LLC (2009); Census (2010) (see references in Section A.1)

Cummins Inc. 2009. 2008 Annual Report on 10-K Form. Available at: http://phx.corporateir.net/phoenix.zhtml?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-6

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.corporateir.net/phoenix.zhtml?c=112916&p=irol-reportsannual. Accessed on February 15, 2010.

Cummins Inc. 2009. 2008 Annual Report on 10-K Form. Available at: http://phx.corporateir.net/phoenix.zhtml?c=112916&p=irol-reportsannual. Accessed on February 15, 2010.

A.2 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-7

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

RPE Multiplier Contributor

Expense 

(¥ Millions)

Relative to 

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 

contributors)

10,602 0.01 Total nonoperating expenses [p. 7, 

Hino, 2009a]

RPE multiplier 1,419,483 1.25

Sources: Supplier Relations LLC (2009); Census (2010) (see references in Section A.1)

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-8

from SR LLC report; see Section A.1 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.3 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-9

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 11,550 1.00 Cost of sales − transportation expense (0.4%) 

[Walter McManus, personal communication] 

Production Overhead

Warranty 304.6 0.03 [p. 40, PACCAR, 2008]

R&D (product development) 341.8 0.03 [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 308.7 0.03 General & administrative (470.2) [p. 24, PACCAR, 

2008] − Transportation (46.5) − Marketing (115.0)

Retirement 118.7 0.01 Benefits paid (48.8) [p. 42 of PACCAR Annual 

Report 2008] + Employer contributions (69.9) [p. 

42 of PACCAR Annual Report 2008]

Health 12.0 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 46.5 0.004 Supplier Relations, LLC

Marketing 115.0 0.01 20% * [Marketing cost from LD Study] (Walter 

McManus, personal communication)

Dealers

Dealer new vehicle net income 46.2 0.004 Walter McManus, personal communication

Dealer new vehicle selling cost 693.0 0.06 Walter McManus, personal communication

Total selling and dealer 

contributors

900.7 0.08

Sum of Indirect Costs 1,921.7 0.24

Net income 1,017.9 0.09 [p. 1, PACCAR, 2008]

Other costs (not included as 

contributors)

1.1 <0.001 [p. 34, PACCAR, 2008]

RPE multiplier 1.33

Sources: Supplier Relations LLC (2009); Census (2010) (see references in Section A.1)

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-10

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.4 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-11

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 

amortization

393.0 0.03

[p. 72, Navistar, 2008]

Maintenance, repair, 

operations cost

358.0 0.03

[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 

income

47.4 0.004 Walter McManus, personal communication

Dealer new vehicle selling 

cost

711.0 0.06 Walter McManus, personal communication

Total selling and dealer 

contributors

829.6 0.07 [p. 25, Navistar, 2008]

Sum of Indirect Costs 4,175.4 0.35

Net income 134.0 0.01 [p. 23, Navistar, 2008]

Other costs (not included 

as contributors)

14.0 0.001 [p. 26, Navistar, 2008]

RPE multiplier 1.36

Sources: Supplier Relations LLC (2009) (see references in Section A.1)

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-12

“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-11). However, the main cost contributors reported in Table A-9 

range within 0.03 of cost contributors reported in Table A-8.

Table A-11. 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-13

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 22,345.9 1.00 Cost of sales [p. 207, Daimler, 2008] + (70% *

Health care)

Production Overhead

Warranty 953.7 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

R&D (product development) 1,056.0 0.05 [p. 62, Daimler, 2008]

Depreciation and amortization 646.0 0.03 [p. 207, Daimler, 2008]

Maintenance, repair, operations 

cost

355.0 0.02 Census

Total production overhead 3,010.7 0.13

Corporate Overhead

General and administrative 655.4 0.03 [p. 144, Daimler, 2008] ( General & 

administrative for Daimler Group was reported as 

4,124) − Health care − Transportation − 

Marketing

Retirement 236.0 0.01 30% * [p. 53, Daimler, 2008]

Health 261.8 0.01 Supplier Relations, LLC

Total corporate overhead 1,153.2 0.05

Selling

Transportation 87.7 0.004 Supplier Relations, LLC

Marketing 222.6 0.01 20% * [Marketing cost from LD Study] (Walter 

McManus, personal communication)

Dealers

Dealer new vehicle net income 89.4 0.004 Walter McManus, personal communication

Dealer new vehicle selling cost 1,340.8 0.06 Walter McManus, personal communication

Total selling and dealer 

contributors

1,740.4 0.08

Sum of Indirect Costs 5,904.2 0.26

Net income 1,607.0 0.07 [p. 207, Daimler, 2008]

Other costs (not included as 

contributors)

0

RPE multiplier 1.34

Sources: Supplier Relations LLC (2009); Census (2010) (see references in Section A.1)

Daimler, 2008. Annual Report 2008. Available at: http://www.daimler.com/investor-relations/reports-andkey-figures/annual-documents/daimler-ag. Accessed February 7, 2010.

Walter McManus, personal communication on February 16, 2010.
A-14

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-keyfigures/annual-documents/daimler-ag. Accessed February 7, 2010.

Daimler, 2008. Annual Report 2008. Available at: http://www.daimler.com/investor-relations/reports-and-keyfigures/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-15

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 28,518.4 0.12 Administrative expenses and selling expenses 

(31,763.9) [p. 75, Volvo, 2008] − 

Transportation (940.5) − Marketing (2,301.1)

Retirement 1,365.0 0.01

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 2,305.1 0.01 20% * [Marketing cost from LD Study]

(Walter McManus, personal communication)

Dealers

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.1)

Volvo Group, 2008. Annual Report 2008. Available at: http://www.volvogroup.com/GROUP/GLOBAL/ENGB/INVESTORS/Pages/investor_relations.aspx. Accessed February 7, 2010.

Walter McManus, personal communication on February 16, 2010.
A-16

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.