Calculating dealer costs should be done before your showroom visit. You can determine exactly what the car originally cost the dealer. This chapter will give you guidelines to find out how much dealers will reluctantly accept as a profit margin for their vehicles.

First, you will need a formula. There are three ways to find this new cost figure:

• Write to a service
• Do the research yourself
• Calculate at the dealership using the factor

Write to a service. You can write to a service that will quote you the dealer’s cost for a vehicle with the options you request. Services like Consumer Reports or the advertisers in the Edmund’s books charge $10 or $15 per car for this information. The only problem with obtaining information this way is that if you are pricing three or four different cars with different engines and options, you can easily spend a lot of money to be spoon-fed the figures you want. It would be much cheaper to find these figures yourself.

Do the research yourself. Look up the information yourself in appropriate publications, such as the annual April auto issue of Consumer Reports or Edmund’s specialty auto books. Remember, you are paying yourself $150 per hour to do all this research. Do this research yourself and have the peace of mind knowing that you have accurate facts because you got them yourself. This research will give you both the dealer’s cost and MSRP (Manufacturer’s Suggested Retail Price) for the base car and the various options. All you need to do is add the desired options to the dealer’s cost for the base car. If this number differs from the sticker price on the vehicle, it may be that there has been a recent price increase by the manufacturer for the car. The MSRP is also called the "sticker list price." This is the undiscounted, advertised price for the vehicle as recommended by the manufacturer. Take the factor for the car and the factor for the options, and use them in conjunction with the figures on the sticker. The factor is explained in detail below.

Calculate at the dealership using the factor. Another item you should pull from the literature is the factor for the base car and for the options. This is valuable information and will allow you to calculate dealer’s cost from the window sticker price of the new car. The factor is typically between .80 and .90. A factor of .85 means, for example, that the car cost the dealer 85 percent of the sticker price on the car. In other words, a factor of .85 means a 15 percent profit on the car because the dealer paid 85% of the sticker price for the car. If you want to get 25 percent off the sticker price, you will find that the dealer will not treat you seriously because that is 10 percent below his own cost.

If your reference books do not note the factor for the car, but the dealer’s cost is given, you can calculate the factor yourself by dividing the dealer’s cost by the published MSRP. For example, if a sticker price is $12,000 and the dealer’s cost is $10,000, the factor is .83 (10,000/20,000). This is pretty realistic.

Car prices may change, but the factors usually stay the same for a given vehicle from year to year. The factor is helpful to know as you negotiate. It will give you confidence in your ability to critically evaluate any salesperson’s statement that he can’t give you your proposed price because it is below his costs. You will immediately know if there is any truth to that statement.

THE STICKER PRICE

Here is how you can interpret and use the information on the car’s main sticker, which is usually on the side of every new car for sale. In many cases, the main window sticker may be accompanied by other smaller ones. These smaller stickers deal with extras, such as a waxing job, special wire wheel or some other item.

Since you did not show up at the dealership before finishing your groundwork, you already know the factors for your car and its options and can calculate the dealer’s cost from the sticker as follows:

• Locate the main price sticker on the car.
• Don’t worry about the other stickers charging for special services.
• Locate the base price for the car (without any extras), and enter the figure in (A) below. This number is usually located on the top of the sticker.
• Total all the extras you know you want, and enter this figure in (B) below.
• Write down the factor for your base car in (C) below.
• Write down the factor for your extras in (D) below.
• Completely disregard any charge for AMU or ADMU, which are simple additional dealer markups (extra profit).
• Disregard all charges for things you don’t want, such as a waxing job, undercoating, etc.
• $______________________
• $______________________
• $______________________
• $______________________

The dealer’s cost for this car with its extras but without the special services such as waxing and pinstripes is (A x C) + (B x D) + transportation (from the sticker). For example, let's evaluate the GS 16v model. The published factor for the car is .87, and the published factor for the extras (air-conditioning, etc.) is .82. Therefore:

List price for the base car $13,439

Air-conditioning list price $ 811

Power windows and defrost list prices $ 119

Alloy wheels list price $ 315

You can calculate the dealer’s cost for the car with air-conditioning, power windows, rear window defroster and alloy wheels as:

(car factor x MSRP for car) + (options factor x MSRP for options) =

(.87 x $13,439) + [.82 x ($811 + $119 + $315)]

(.87 x $13,439) + (.82 x $1,245) = $11,692 + $1,021 = $12,713

Also, add destination charges (transportation) to the final calculation. This figure is on the main sticker on the car. On our example car, they are:

$ 343: $12,713 + $343 = $13,056.

Always add destination charges at the end of your calculations. The factor does not affect these transportation charges.

Compare this to the total sticker price for the car, plus the options, plus the transportation:

$13,439 + ($811 + $119 + $315) + $343 = $13,439 + $1,245 + $343 = $15,027

If the dealer sold the car at list price, the gross profit on this segment of the transportation would be list price less his cost:

$15,027 - $13,056 = $1,971

Although the dealer has costs, they should not all come out of your pocket.

CONSTRUCTING A BID

When negotiating for the above car, the price to aim for would be the dealer’s cost plus $300 profit for the dealer. That would be $13,056 plus $300, or $13,356. In order to end up here, initially bid $13,256 ($100 less). Now, if this is a "hot" car, or if it is a seller’s market, you may need to pay more than this bare-bones price. But at least you know where to start. Offering a few hundred dollars over a dealer’s base costs puts the salesperson in a terrible predicament. Your opening price is not so ridiculous that he can just ignore it. It is just low enough to lower his expectations and still keep him interested.

Some dealers will try to itemize their costs for such things as advertising and charge you for them separately on top of the agreed-upon price. These costs are certainly a part of the dealer’s operating expenses, but whether you should pay them as a separate item on the car is another matter. In addition, the dealers have costs that will be deducted from that $300 in profit you are attempting to leave them, such as the commissions on the floor plan (financing) they pay on the cars. But that’s not your problem. It's there's.

To summarize, you can unearth exactly what vehicles cost the dealers. You can also find the factors that will allow you to calculate their exact costs using the window stickers on the cars. This is useful in case there has been a price increase, since the list you read was published. Knowing this information is like playing a hand of poker and catching a glimpse of your opponent’s cards – it gives you a great advantage.

From your calculations, you can begin to negotiate in order to find out how much money over cost the dealer will accept for the new car. Aim to limit the dealer to only $300 over cost. As you can see from the sample figures above, this is a substantial savings for you.