Originally Posted by diarmadhi
Not to try and confuse the issue but the other term you may hear thrown around is Invoice Price.
Invoice price is the Actual price the dealer paid to the car manufacturer.
You're getting close but not 100% there.
Dealer's Actual Cost = (Invoice Price - Factory To Dealer Incentives - Factory Holdback)
The Dealer may have paid the manufacturer the Invoice price, but after he sells the car the Factory pays the Dealer an incentive payment which lowers his true cost. Depending on the MSRP of the car or the time of the year it can range from $500 upto $10K (if its a top-of-line Mercedes). The Factory also pays Dealer what is called a Dealer Holdback which is typically 2-4% of the MSRP of the car which also reduces the Dealer's true cost. You need to calculate what a dealer's true cost is and then gross it up by 5-6%. That's a fair price.
It's kinda like when you buy something at an electronics store and get a mail in rebate...You "Paid" $400 for your new computer and you have the receipt to prove it (read Dealer Invoice), but after the Mfg. sends you your $50 mail in rebate (read Factory to Dealer Incentives and Dealer Holdbacks), your true cost is $350.
If you don't want to do all the research to figure out the Dealer's true cost a good rule of thumb is to take the unadjusted MSRP from the window sticker, subtract the Destination Charges and multiply that number by .85. Add back the Destinations and gross that number up by 5-7% for a fair offer.
I say unadjusted MSRP because they sometimes add on things such as "Dealer Prep", "Market Value Adjustments", and other cr*p that is nothing more than pure profit margin padding.