Voltaic Vehicles, Inc.

The amount Voltaic generated on its contract with DHS in 2022 was simply staggering and really stood out among its industry competitors! One has to wonder whether this has something to do with the fact that Voltaic's CEO is politically well connected and has doled out hundreds of thousands of dollars in political contributions to both parties in Congress.

Excerpts from the December 31, 2022 issue of DMV Post

Voltaic Vehicles, headquartered in Alexandria, VA, is a US-based electric vehicle manufacturer. It was founded in 2006 by Dr. Scott Pope, an engineering professor at the George Washington University. Over the years, it has become a well-established electric vehicle manufacturer for homeland security, primarily providing small ground transit vehicles for the TSA. It consists of three departments: Civilian Electric Vehicles (CEV), Government Electric Vehicles (GEV) and Carriage, Electrification, and Battery (CEB).

CEV produces functional electric vehicles for businesses and their associated real estate parks. Generally, these vehicles are used to move people and products around corporate headquarters and industrial parks. CEV customers are typically located in the suburbs of big cities, close to Voltaic's CEB offices. CEV operates in a fairly competitive market; almost all of its products are considered "standard" in the industry, with the primary difference being electrification. Thus, it prices its products using the market prevailing rates. Businesses typically update vehicles on a predicable schedule. Businesses typically place orders for new vehicles several months in advance which gives Voltaic plenty of time to schedule production and oftentimes enables Voltaic to combine orders from different businesses into a single production run.

GEV is a defense contractor and produces certified ground transit vehicles exclusively for the US Transportation Security Administration. GEV locations are scattered around the United States to better serve the various airport locations. GEV's products are uniquely researched and developed in house and protected by patents. GEV charges DHS a price equal to full cost plus a negotiated margin. In order to become more nimble, DHS moved to a JIT system which requires Voltaic to produce vehicles on short notice and in small batches. While emergencies are infrequent and unexpected, DHS requires a quick response from Voltaic in the event of one. Consequently, CEB must store large quantities of raw materials to ensure it is ready if an emergency arises. Furthermore, ground transit vehicles usually operate in harsh conditions. As such, Voltaic must test vehicles extensively under simulated conditions to ensure quality.

Finally, CEB provides manufacturing support to both CEV and GEV that includes machine setup, inventory management, quality control, and customer service.

Voltaic is currently mired in a public relations quagmire. In December 2022, DMV Post, a widely read and respected local newspaper, ran a scathing article accusing Voltaic of excessively charging DHS for electric vehicles and making a big profit at tax payers' expense. Voltaic has been working hard to restore its image and anticipated that the public would scrutinize its financials.

Existing Cost System at Voltaic

The existing cost system at Voltaic calculates costs for CEV and GEV. Costs at CEV and GEV include direct labor and direct materials. The direct labor and direct materials costs are variable costs varying with the volume of vehicles. Costs at CEB are treated as overhead and allocated to CEV and GEV based on the total number of vehicles. Costs at CEB include machine setup, inventory management, quality control, and customer service. The budgeted operating income statement for Voltaic in 2023 is provided in Exhibit 1. The expected volume of vehicles for CEV and GEV is 800,000 and 400,000, respectively.

A New Cost Study

William Pope, a Senior Vice President of Voltaic, is concerned with the high budgeted cost at CEV in 2023 and wonders whether more time and attention should focus on the DHS business. To more precisely assess each department's performance, in January 2023 Mr. Pope hired an outside consultant to conduct a new cost study which reveals the following information.

1. Machine setup costs are generally incurred as the production line is being prepared. These costs do not related to the size of the production run or the type of vehicle. Rather, the costs seem to vary with the number of setups.

2. Inventory management costs refer to the costs incurred in storing raw materials. The costs seem to be caused by weight time. Weight time is an item's weight (by pounds) multiplied by the length of time the item stays in CEB's warehouse. Both the length of time that inventory is stored and the weight of the item impact the inventory cost incurred by Voltaic.

3. Quality control costs appear to be driven by the number of tests conducted. More sophisticated components within a vehicles require more testing. This driver seems to proxy for testing sophistication.

4. Customer service costs are incurred when Voltaic sends its service personnel to its customers for emergency repairs. These costs seem to be primarily related to the number of travel miles.

5. The direct labor and direct materials costs at CEV and GEV are evaluated the same as in the existing system; these are variable costs varying with the volume of vehicles.

Exhibit 2 contains some of the operating data the consultant projected for 2023. William Pope understood that the pricing of GEV parts would be affected by any change in Voltaic's cost system during 2023 (while the negotiated margin would remain the same).

Recent Developments

CEB's quality control service recently purchased a piece of testing equipment, called High Capacity Component Testing Probe (HCCTP), that detects component issues within electric vehicles. It intends to offer this machine to be used by external customers only. The machine's useful life is 1 year and its capacity is 400 tests; its fixed cost (including acquisition cost) is $1,000,000; its variable cost is $5,000 per test. Three businesses have expressed interest in using this machine. Combined, these three customers plan to conduct 200 tests. Voltaic expects to charge a 10% margin on its "reasonable" cost of serving these customers but is struggling with how to determine what constitutes a "reasonable" cost.

The actual number of vehicles sold in 2023 is 1,250,000 and 200,000 for CEV and GEV, respectively. Exhibit 3 provides data on budgeted and actual direct materials costs in 2023.

Voltaic is also in the process of compiling its budget for 2024. 20% of machine setup costs and 40% of quality control costs are fixed, while all other CEB costs are fixed. Exhibit 4 contains some of its projections for 2024.