We all have an idea of the prices of different automobiles around us, but do you know the production costs of these vehicles?
We often only bother about how much it’ll cost us to purchase a car. Well, the answer may not be as direct as you think.
The truth is that the manufacturing cost for cars differs from the prices of those cars on the market. However, many automakers do not reveal the expenses incurred during the production process.
Therefore, the final costs of manufacturing a vehicle depend on several factors.
How Much Does A Car Cost?
Manufacturing a car depends on fixed and variable expenses to break it down into more straightforward bits. Let’s look at these two categories of costs.
As the name implies, these costs remain the same no matter how many car models you make. Research and development are essential in the production of a car.
When a new model is manufactured, the manufacturers do comprehensive tests, which may last a while. Plus, it adds an unavoidable cost.
These expenses include prototype testing, employee wages, facility maintenance, etc. This cost can be very expensive and further increases when delivering the prototype for production.
Although these costs are inevitable, they further decrease during the second phase of producing the cars. This is because the technology from the first manufacturing process was applied to the second generation model.
For instance, the fixed cost for the second-generation Toyota Prius car model was lower than the first-generation models because they used technology from the earlier generation.
This is more like the opposite of the fixed cost. The higher the number of manufactured cars, the higher the variable price per unit in terms of the variable cost.
The variable cost is subject to change depending on the number of cars manufactured. Hence, this cost includes all the necessary expenses during the production of that particular model.
Factors Influencing the Manufacturing Process of a Car
The automobile industry is vast, relying on several factors to progress. However, we can break down car manufacturing costs into three essential parts.
They include the material expenses such as purchasing aluminum for the car’s body, plastic, rubber, and other necessary materials.
Secondly, labor expenses include workers’ wages, health insurance, and related expenses. Then we have the general costs that cover the bills, factory maintenance, tools maintenance, etc. All these expenses add up to building a car.
Nevertheless, we’ll be reviewing some factors that influence the cost of making the car.
Without a doubt, raw materials are a significant part of making the car. These raw materials contribute to the final makeup and functionality of the car. Without the raw components, the manufacturers cannot complete the process. In addition, the cost of each raw component partly determines the final cost of the vehicle.
Research and Development
Research is essential before starting anything new, and cars are no exemption. It may take some time, depending on the nature of the research. This is because you’ll need to plan for every part that makes up the car’s build.
Cost of Energy
Energy costs are vital factors influencing a vehicle’s manufacturing costs. The factory won’t operate successfully without energy supplies like fuel, electricity, and water.
The lack of these energy sources will cause a slow process and may damage the mechanical equipment available in the factory.
Packaging and Logistics Cost
Transporting the vehicle parts from one manufacturer to another requires certain expenses, which may not come cheap.
The cost and time required to ship the raw materials and finished product from the supplier to the retailers are usually significant.
Also, the large vehicles involved in this logistics process require fuel, adding to the increased expenses. Therefore, these logistics and packaging costs influence the production cost of a car.
Labor and Advert Costs
The human resources involved in producing vehicles aren’t small, and the workers must be paid their wages.
Furthermore, after production, the advertisement comes next. The advertising cost is crucial as it adds up to the success of that specific car brand, which improves sales, thereby raising more revenue for the automobile company.
We must also consider the sales taxes when calculating the production costs of an automobile. The tax they pay determines if a profit will be made after selling the vehicle. Plus, sales taxes also influence the final price of the car.
Cost of Greenhouse Gas Emission Fees
The laws mandate fees paid by companies and factories producing cars and causing pollution. Also, some laws limit the excessive production of these gases that cause pollution.
One effective way to reduce gas emissions is to make companies that break the rules pay fines.
Vehicle production costs differ depending on the model, year, and car brand. For instance, some cars incur more because they have high-end features not available in other car models.
Also, factors like dealership markups, overhead costs, and other unforeseen factors play an essential role in determining the production cost.
How Much Would it Cost to Build a Car from Scratch?
It may not be easy to calculate how much it would take to build an automobile from scratch. The best way to estimate this is to divide the total cost at the dealership by two.
This excludes extra expenses incurred after the final production.
The prices of most cars are different depending on the features of the car models in question. Smaller car models have lower expenses, while larger models attract higher expenses mainly due to their volume and weight.
Extra costs after production vary considerably depending on the car’s size. However, you should also note that the smaller vehicles require more production costs.
Therefore they are sold at higher prices to allow the manufacturers to make a reasonable profit.
For instance, a portable vehicle may incur extra costs of about 60% of the production expense. This is because of the little margin needed for their production. Thus, decreasing the car value.
Plus, more percentages are affixed to smaller or more portable cars to cover up for the expenses and prevent losses.
Including the supplementary costs, automobile manufacturers make around a 5% profit margin on each car. This value is determined by using the formula mentioned above, dividing the total costs at the dealership by two.
Manufacturing Cost Breakdown of a Vehicle
It may not be easy to estimate the total cost of manufacturing a vehicle from scratch. However, some studies have been conducted in the industry to give the public more clarity.
- Raw Materials: This makes up for the highest costs in the industry. It constitutes about 57% of the total production cost.
- Research, Development, and Engineering: It ensures full functionality and around 16% of the total cost.
- Advertisement Fees: This also adds up to the cost. According to the research, the advert cost per unit sale was about $1,091.
- Dealership Markups: The dealership markups averaged $1,497 per unit.
- Sales Tax: Sales tax evaluation per car is $4,984.
How Much Does it Cost to Manufacture a Toyota?
Toyota is arguably the most popular vehicle brand globally. According to Forbes, the Toyota Corolla ranks as the best-selling car worldwide.
Considering its affordability, it isn’t surprising that many people want to know about its manufacturing cost.
Furthermore, like many Japanese vehicle manufacturers, Toyota relies on huge manufacturing volumes to reduce its production costs to the barest minimum.
This makes them more accessible and affordable than their competitors in the automobile industry.
In 2015, Toyota traded more than 1.3 million units of the Corolla model worldwide.
For a Toyota car that sells for $17,000, the company might gain about $3,500. Thus, this leaves the production cost at an estimated $13,500.
For example, for the 2020 Toyota hatchback model that goes for around $20,000 – $24,000, the manufacturers may make about $4,500 as a profit, leaving the production cost approximately $16,000 to $19,000.
Manufacturing a car comes with huge expenses. You should note that these costs vary based on the size and model of each vehicle.
Some companies incur higher production costs due to the car model’s features. The Toyota brand is one of the most popular and affordable brands worldwide.
This is because they depend mainly on car production volume. Plus, they record massive sales annually.
While we cannot give an exact figure, we know that raw materials make up many production costs.
Besides this, other vital factors like research and development, energy costs, labor, logistics, advert costs, and other factors contribute to the overall production expense of your vehicle.
Regardless, you can have an idea of the production cost of your car when you factor in all of these expenses.