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Comment by refurb | Hacker News Reader

On a per-unit sold basis, Tesla Model S is wildly profitable, with a gross margin north of 30%

OK, I searched for "30%" in your link and nothing came up. So I scanned and saw nothing that claimed a gross margin of 30%. Where's it hiding?

I assume by gross margin you mean, "revenue - COGS". This of course ignores all the fixed costs, so it doesn't mean much. Even if they weren't investing in future growth, their fix costs could easily drag that 30% (still don't know where that came from) down into negative territory.

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> This of course ignores all the fixed costs, so it doesn't mean much.

Au contraire, my friend. In business finance there are roughly 2 methods to calculate costs per unit: direct costing (DC) and absorption costing (AC) and they both have their benefits/disadvantages.

DC is where you leave out fixed costs to estimate if you will ever reach economics of scale. If a growth in production doesn't lead to diminishing marginal costs under the DC method, then you can never reach profitability under AC.

As long as DC leads to gross margin profits, there's hope of economies of scale and "all" you need to do is to increase production to make it work.

Of course this distinction doesn't apply for accounting and your P&L (however there are ways to get 'creative' with costs and depreciation there as well) so this is purely about decision making: should I build product/factory or not?

While I agree fixed costs shouldn't be ignored, isn't it true that they are called fixed costs for a reason? As in, as Tesla scales up production and is selling way more cars, their fixed cost per unit sold will go down with economies of scale. I think gross margin is much more meaningful here, but definitely correct me if I'm wrong.

Fixed costs aren't totally fixed, it's just that they won't change for every unit produced. But it may be the case that they will change when you produce say an additional 100 units (or 1,000 or 10,000 units).

So if you ramp up production and you need for example an additional factory, that means your fixed costs will go up.

>While I agree fixed costs shouldn't be ignored, isn't it true that they are called fixed costs for a reason

Building cars is a capital and R&D intensive business. I'm not sure where the idea that those costs will basically go away comes form.

They don't "go away", they get divided amongst a greater number of cars as production ramps up.

It's not even just Tesla cars, as other electric cars come to market, the prices for components they need in common (battery being the big one) will fall with scale too.

The battery is about half the cost of an electric car and battery prices have been dropping steadily, between 2007 and 2014 it halved (if you look a the whole market) or reduced by 2/3rds (if you look at leading manufacturers like Tesla) and are projected to continue to decline by 8-10% per year.

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