Financial Analysis in Automotive Programs

The objective of this chapter is to understand different types of costs associated with the various tasks involved during the product life cycle. The chapter describes non-recurring and recurring costs, fixed vs. variable costs, manufacturing costs, quality costs, safety costs, product pricing approaches, make vs. buy considerations, program termination costs, and effect of time on cash flow during the entire life cycle of the vehicle program. The chapter also presents the financial analysis for determining costs, revenues, and profits as a function of time and how the present values of different cash flows are considered to take account of interest (or discount factor) and inflation in the evaluation of different alternatives. The ratio of profits generated by the vehicle program to costs incurred by the vehicle program is one of the measures used to compare the acceptability of a vehicle program. The actual costs should be continuously compared with the budgeted costs to ensure that the program meets its budgetary requirements. Differences between the budgeted costs and actual costs may signal over- or under-expenditure or errors in estimating the budgeted costs.