Chapter Three STRUCTURE OF DLR PRICES A sale taes place when mantenance personnel draw a DLR from supply. Dependng on the nature of the transacton, customers face three dfferent prces for DLRs: standard prce, exchange prce, and carcass prce. The standard prce s pad when the customer purchases a servceable DLR wthout turnng n an unservceable one. The exchange prce s pad when a customer exchanges an unservceable DLR for a servceable one. The carcass prce s then pad f the customer fals to return the unservceable DLR wthn 60 days of recevng the servceable unt. 1 The nterrelatonshps among these prces are depcted n Fgure 4. The three fund prces assocated wth DLR transactons are desgned to recover from customers the full costs assocated wth stoc fundng for depot-level repar. The FAC s ntended to recover the acquston cost of a new DLR; t s calculated as the last representatve acquston cost brought up to current day dollars. 2 The depot repar cost s ntended to recover drect and certan ndrect costs assocated wth depot-level component repar. The surcharge s ntended to recover varous other types of expenses assocated wth the fund. The depot repar cost and the surcharge are dscussed n more detal below. 1 Smlarly, the customer receves a credt equal to the standard prce when returnng a servceable DLR and receves a credt equal to the carcass prce when returnng an unservceable DLR wthout purchasng a replacement. 2 Department of the Ar Force, Ar Force Fnal Implementaton Plan Stoc Fundng Depot Level Reparables, draft, January 1993, p. 5 9. 15
16 Transfer Prcng for Ar Force Depot-Level Reparables RANDMR808-4 Standard Prce = Exchange Prce + Carcass Prce Standard Prce = FAC + Surcharge Surcharge DRC Exchange Prce Surcharge DRC FAC Carcass Prce Carcass Prce Fgure 4 Relatonshp Between Standard, Exchange, and Carcass Prces and FAC Standard prce = Forecast acquston cost (FAC) + surcharge Carcass prce = FAC depot repar cost (DRC) Exchange prce = Standard prce carcass prce = DRC + surcharge. DEPOT REPAIR COST For the th type DLR (referenced by natonal stoc number, NSN) repared at the depot, the depot repar cost s composed of drect costs, producton overhead, and general and admnstratve (G&A) costs. The drect costs nclude average drect labor costs such as techncans and other shop-level personnel (calculated as cost per hour tmes standard repar hours) and the average cost of materals that go drectly onto the specfc end tem beng repared. Included n the average drect materal cost of each type of LRU are the costs of any of ts component SRUs that must be replaced. The costs of the SRUs that are DLRs nclude (a) the exchange prces for those tems purchased from the fund and (b) the drect labor and materals
Structure of DLR Prces 17 (other than DLRs), producton overhead, and G&A costs for those that are job routed. 3 Depot repar cost average drect materals + average drect labor + producton overhead + G& A. Producton overhead and G&A are costs assocated wth DMAG. Producton overhead ncludes costs of all ndrect actvtes controlled by the tem s product drectorate (e.g., ndrect labor, schedulng, plannng, ndrect materals, and equpment deprecaton). 4 The hourly rate for these costs s constructed at the shop level, and costs are allocated based on drect product actual hours (DPAH). 5 G&A costs nclude all costs not ted to a sngle product drectorate (e.g., utltes, base support, and headquarters costs). Wth few exceptons, these rates are constructed at the drectorate level. G&A costs are also allocated based on DPAH. where Producton overhead Producton overhead rate DPAH, Producton overhead rate hourly cost of (ndrect labor + schedulers + planners + ndrect materals + equpment deprecaton + other ndrect product drectorate actvtes) G& A G& A rate DPAH, 3 That s, the DRC does not nclude a surcharge for SRUs that are job routed. 4 A product drectorate s a major dvson of an ALC devoted to support of a specfed group of NSNs. NSN groups are defned by major subsystem, weapon system, etc.; for example, the F-16 avoncs product drectorate at Ogden ALC. 5 Drect product actual hours s an estmate of the actual tme spent performng a drect labor tas. The DPAH for a gven NSN s calculated by dvdng the drect product standard hours for that tem by the drect labor effcency (DLE) for that repar shop. The DLE for a repar shop s the total standard hours for all wor n the shop dvded by the actual hours for all wor n the shop, that s, an average effcency. See Requrements/Fundng Handboo, Drectorate of Fnancal Management, Hll Ar Force Base, subsecton 7-A.
18 Transfer Prcng for Ar Force Depot-Level Reparables where G&A rate hourly cost of (utltes + base support + HQ + other costs not ted to a sngle product drectorate). The depot repar cost porton of the DLR exchange prce s subject to varous errors. Frst, the calculaton of drect labor cost s based on nfrequently updated wor standards and on average, rather than NSN-specfc, effcences. Second, many ndrect and G&A costs are not ncurred n proporton to DPAH despte beng allocated n ths way. Thrd, the depot repar cost s based on data from two years earler (see Chapter Four). For example, the depot repar cost porton of the FY 1996 DLR exchange prce was calculated n FY 1995 and was based on FY 1994 data. The 1994 cost data were adjusted for nflaton, pay rases, and other cost changes to the extent they were nown. For DLRs repared by contractors, the depot repar cost s the estmated average prce pad to the contractor. SURCHARGE Support system costs assocated wth the SMAG are recovered from customers through a DLR prce surcharge. These costs totalng $1.8 bllon n FY 1995 nclude frst destnaton transportaton, nventory mantenance, deprecaton, the Cost of Operatons Dvson (COD), condemnatons, nflaton, and over/underrecovery of costs from the prevous year (prce stablzaton). 6 These costs are allocated to an NSN s repar prce n proporton to ts FAC. The proporton, P, s the same for all DLRs and s calculated as P = total costs to be recovered n FAC, where n s the forecasted demand for servceables of NSN type. Thus, the exchange prce of a DLR of NSN type s 6 Unted States Ar Force, Defense Busness Operatons Fund: Fscal Year 1997 Defense Budget Revew, September 22, 1995, p. 244.
Structure of DLR Prces 19 where Exchange prce of DLR = depot repar cost + surcharge, Surcharge = P FAC. * Table 2 dsplays the breadown of the surcharge by element for FY 1994 FY 1996. The three largest cost categores are the COD, condemnatons, and prce stablzaton. The COD s a dvson of the Ar Force Worng Captal Fund. Its surcharge covers the costs of people, materals, and transactons supportng the Reparable Support Dvson of SMAG. Sgnfcant expendtures n the COD are for Defense Logstcs Agency (DLA) ssues and recepts, tem managers, and other nventory control pont costs. The condemnaton surcharge covers the predcted annual cost of replacng all condemned DLRs, that s, those that cannot be repared. The prce stablzaton surcharge recovers the dfference between total SMAG costs and total SMAG revenues from the prevous year and, n some years, recovers other costs as mandated by the Offce of the Secretary of Defense (OSD) (Comptroller). It s typcally postve when total costs were underrecovered durng the prevous year and negatve when total costs were overrecovered. Table 2 Elements of the RSD Surcharge (n percentage) Element FY 1994 FY 1995 FY 1996 Frst destnaton transportaton 0.48 0.01 0.01 Inventory mantenance 0.63 0.00 0.65 Deprecaton 0.31 0.48 0.18 Cost of Operatons Dvson 5.63 3.40 3.81 Condemnatons 5.84 3.82 5.74 Prce stablzaton 1.46 3.81 1.73 Inflaton ndex 0.30 0.38 0.00 P 14.65 11.90 8.66 NOTE: The FY 1996 nventory mantenance surcharge recovers costs for the Jont Logstcs Systems Center and certan software costs. These costs were not recovered by ths surcharge n prevous years.
20 Transfer Prcng for Ar Force Depot-Level Reparables In FY 1995, surcharge revenues were 47 percent of total RSD revenues. Because the rato of an tem s FAC to ts depot repar cost vares greatly among NSNs, the surcharge as a percentage of the exchange prce also vares greatly. For example, among a sample of avoncs DLRs repared at Ogden Ar Logstcs Center, we found that the FY 1995 surcharge ranged from 29 to 94 percent of the exchange prce. To llustrate further, Tables 3 and 4 contan FY 1996 exchange prces and assocated surcharges for a broad sample of relatvely hgh-demand F-16 and C-130 DLRs. The frst and last F-16 DLRs n Table 3 are noteworthy. For the recever-transmtter n LANTIRN targetng pods, the depot repar cost s $6,509 and the FAC s $207,517, leadng to a surcharge that s 73 percent of the tem s exchange prce. Conversely, the depot repar cost for the 20-mllmeter automatc gun s $8,046 and the FAC s $8,476, leadng to a surcharge that s only 8 percent of the tem s exchange prce. EXCHANGE PRICES ARE ARTIFICIALLY HIGH The Ar Force has ncorporated broad categores of costs nto DLR exchange prces that are unrelated to depot-level repar. In partcular, the surcharge and, to a lesser extent, the depot repar cost for any DLR nclude elements that are unrelated to ts rate of repar. The prce stablzaton surcharge recovers costs that are unrelated to any repar performed durng the current year. The COD surcharge ncludes many costs that are fxed wth respect to rate of repar for example, database managers. Furthermore, the COD costs that are related to rate of repar are not allocated drectly to the tems generatng the charges. Instead, they are allocated n proporton to the FAC of each repared tem. For example, second destnaton transportaton charges and DLA ssues and recepts charges are ncorporated nto the COD surcharge rather than allocated drectly to the tems generatng the charges. Unle the prce stablzaton and the COD surcharges, the condemnaton surcharge recovers costs that are drven entrely by the rate of repar; however, the condemnaton surcharge does not match the costs of the replacements wth the types of DLRs that are condemned.
Table 3 FY 1996 Exchange Prces: F-16 DLRs DLR Exchange Prce (EP) Depot Repar Cost (DRC) Surcharge a Surcharge as % of DRC Surcharge as % of EP Recever-transmtter, LANTIRN targetng pod $24,480 $6,509 $17,971 276 73 Interface for bombng fre-control component 2,547 782 1,765 226 69 Oscllator, AN/ALQ-184 electronc countermeasures pod 12,395 6,441 5,954 92 48 LANTIRN computer module 18,296 9,571 8,725 91 48 Low-pressure turbne, F110 engne 39,103 20,724 18,379 89 47 Horzontal stablzer 10,458 6,700 3,758 56 36 Brae stac t 2,018 1,386 632 46 31 Power supply, AMRAAM 1,641 1,167 474 41 29 Hgh-voltage power supply, AN/ALQ-184 electronc counter-measures pod 11,414 8,801 2,613 30 23 Arcraft leadng edge 4,890 4,097 793 19 16 Augmentor nozzle flap, F-16 engne 770 681 89 13 12 Hgh-pressure exhaust nozzle seal, gas turbne engne 693 613 80 13 12 20-mllmeter automatc gun 8,780 8,046 734 9 8 a Surcharge = FAC *.0866. Structure of DLR Prces 21 Utopa R
DLR Table 4 FY 1996 Exchange Prces: C-130 DLRs Exchange Prce (EP) Depot Repar Surcharge as Cost (DRC) Surcharge a % of DRC Surcharge as % of EP Recever-transmtter, RT-1504, AN/ARC-164 rado set $1,579 $719 $860 120 54 Rado recever R101/A, ARN-6 1,077 651 426 66 40 Sgnal data converter, AN/ARC-164 rado set 172 103 69 66 40 Crcut card assembly, AN/ARC-164 rado set 447 289 158 55 35 Electronc control amplfer, E-4 automatc plot 1,827 1,198 629 53 34 T-1307A rado transmtter, AN/ARC-164 rado set 811 574 237 41 29 7000 channel syntheszer, AN/ARC-164 rado set 736 556 180 32 24 Beam-scannng antenna, ARA-25 2,275 1,740 535 31 24 Alttude transmttng functon, control, alttude, automatc plot 684 521 163 31 24 Crcut card A10, control nput, ARN-11 119 94 25 27 21 Cable assembly, AN/ARC-164 401 333 68 21 17 a Surcharge = FAC *.0866. 22 Structure of DLR Prces Utopa R
Structure of DLR Prces 23 Condemnaton surcharge = FAC cost of replacements for NSN. n FAC As a result, low condemnaton rate tems are overcharged, and hgh condemnaton rate tems are undercharged. For example, avoncs LRUs are rarely condemned and often have hgh acquston costs. Ths combnaton of factors guarantees that the exchange prces for avoncs DLRs reflect the costs of replacng other types of DLRs such as mechancal tems. In the sample of avoncs LRUs repared at Ogden referred to above, the condemnaton surcharge ranged from 9 to 30 percent of the exchange prce. Producton overhead and G&A costs n the depot repar cost nclude elements such as base support and headquarters costs that are unrelated to the rate of repar. 7 Other elements of producton overhead and G&A costs are related to the rate of repar and should not cause DLR exchange prces to be artfcally hgh, on average. However, all producton overhead and G&A costs are arbtrarly allocated to depot repar cost n proporton to drect product actual hours. Costs that are related to the number of repars rather than the number of labor hours, for example, may be overallocated to repar actvtes that are relatvely labor-ntensve and underallocated to repar actvtes that use relatvely few labor hours. 8 We are unaware of any costs that have been left out of the exchange prce other than ppelne nventory costs (dscussed below). However, we do not beleve that the excluson of ths cost category s suffcent to offset the ncluson of the non-repar-related costs. Thus, 7 At Ogden ALC for FY 1995, the average drect cost per DPAH was $45.08, the average G&A cost per hour was $10.21, and the average producton overhead cost per hour was $26.75. 8 For a clear dscusson of the problems caused by napproprate cost allocatons and how the problems were solved n a relatvely small organzaton, see Kovac and Troy (1991). (Ths paper s summarzed n Appendx A.)
24 Transfer Prcng for Ar Force Depot-Level Reparables for the typcal DLR, the exchange prce wll exceed the cost of depot repar. 9 9 It s unclear whether or not exchange prces for tems repared by contractors are hgher or lower than the costs assocated wth the transacton. Certanly the depot repar cost porton of the exchange prce accurately reflects the margnal/varable cost ncurred by the support system. However, the surcharge may over- or underrecover the contractng, management, and replacement costs that would be ncurred.