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EXHIBIT I

BUICK-OLDSMOBILE-PONTIAC ASSEMBLY DIVISION,

GENERAL MOTORS CORP., Detroit, Mich., July 15, 1954.

To: Commander, Headquarters Air Materiel Command, Wright-Patterson Air Force Base, Ohio.

Attention: MCPPAF-4.

Through: Air Force plant representative, Mobile Air Materiel Area, Air Materiel Command, Buick-Oldsmobile-Pontiac Assembly Division, General Motors Corp., Kansas City, Kans.

Subject: Proposal for redetermination of prices of F-84F aircraft produced on contract No. AF 33 (038)-18503.

Pursuant to the revision-of-prices clause of contract No. AF 33 (038)-18503, the contractor submits for the purpose of price redetermination proposed prices for the first segment of 71 F-84F airplanes, and forward prices for 528 airplanes ordered under this contract. A separate price proposal with respect to spare parts will be made in the near future.

PRICES

The contractor proposes a retroactive price of $2,391,596 for each of the first 71 airplanes, or a total aggregate amount of $169,803,316, as set forth on schedule A attached. On this basis, the contract price for the first 71 airplanes should be increased by the sum of $49,983,716.

It is appreciated that the principal causes of the increase over the contract unit price of $1,687,600 are known to the Air Materiel Command. Nevertheless, believing it appropriate to review them at this time, the contractor has prepared and attached to this proposal a summary of the more important contributing factors.

The forward prices proposed for the remaining 528 planes ordered under this contract as set forth on schedule B, attached hereto, summarized as follows:

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ENGINEERING CHANGES-CONTRACT CHANGE NOTIFICATIONS

The proposed retroactive price for the first 71 aircraft includes the price effect of complying with the engineering changes on contract change notifications per schedule A-2 attached.

The proposed forward prices are based on specifications for the 71st F-84F airplane; and include no provision for engineering changes other than the contract change notifications set forth on schedule A-2 which were incorporated in the 71st airplane. Price changes for complying with engineering changes having an effective point subsequent to plane No. 71 will be negotiated under the "Changes" article of the contract.

DELIVERY SCHEDULE

The forward prices proposed herein are based upon the present delivery schedule as set forth in contract change notification No. 85, and will be subject to change in the event of any substantial revision to that delivery schedule.

BASIS OF PRICE COMPUTATIONS

In the computation of prices, both retroactive and forward, the contractor has given consideration to the agreements made between General Motors Corp. and the Air Force with respect to the cost of certain work which was to be excluded from the profit base; and to negotiations with the Government concerning pension plan provisions and General Motors central office expense.

QUALIFICATION OF PRICES

The proposed retroactive and forward prices are subject to further change upon determination by the Government of "true depreciation" applied for by Cessna Aircraft Co., Beech Aircraft Corp., Saginaw steering gear division, General Motors Corp., and Fisher body division, General Motors Corp.; and for price adjustments resulting from price redeterminations of the following subcontractors currently in process:

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If this proposal meets with your approval, your acceptance should be evidenced by an appropriate supplement to the subject contract incorporating the revised prices.

GENERAL MOTORS CORP.

BUICK-OLDSMOBILE-PONTIAC ASSEMBLY DIVISION,
JOHN F. GORDON,

Vice President.

REVIEW OF PRINCIPAL FACTORS OF THE INCREASE OVER CONTRACT PRICE OF THE FIRST 71 F-84F AIRPLANES

PROGRAM CHANGES

The contractor's original price proposal for the first 71 F-84F planes was made September 26, 1951, and culminated in a definitive contract, dated April 25, 1952, which called out a price per plane of $1,500,850. As the result of a delivery schedule change made in December 1952, this price was increased by $186,750 to $1,687,600 covered by a supplement to the contract dated May 28, 1953. This price still stands in the contract.

From the foregoing it may be observed that the factors upon which the present contract is based are those which were current back in the fall of 1951, with the single exception of the effect of the December 1952 delivery schedule change.

Since September 1951, many changes in the product and the program have taken place and these changes have had an important impact on the proposed price.

Some of the more significant developments are:

1. As a new product the F-84F airplane was not proven in test flight until early in 1953. This resulted in a heavy and continuous flow of corrections and redesign data. Furthermore, the lead time of the prime design contractor's equivalent planes, originally established at 8 months, was drastically reduced by changes of that company's delivery schedule. This deprived BOP of the benefit of the prime design contractor's efforts to eliminate design troubles in production.

2. The delay in receipt of engineering data and the heavy volume of corrections and design changes created a need for more toolmarkers, tool designers and engineers than would normally be required; however, there was a critical shortage of manpower in these fields, making it difficult for the contractor to maintain the program timetable.

3. Important changes to be incorporated in the 47th airplane, such as the maneuvering stabilizer, which also necessitated major redesign of the aft fuselage section; new speed brakes, and many other changes caused production delays. Complete engineering data on the maneuvering stabilizer, originally scheduled for June 1952, was delayed more than 1 year; and its redesign was required as late as 1954.

4. From the beginning the program was retarded by failure to receive sufficient priority for machinery and equipment, creating the necessity for improvised methods and the use of substitute machinery.

5. The schedule on which the price of $1,687,600 each for the first 71 planes was based, called for 83 planes by the end of 1953 and acceleration to a peak of

60 a month by July 1954. Based on the contractor's current schedules, which requires 247 deliveries by December 1954, the two schedule changes constitute a stretchout of almost 9 months.

The foregoing developments along with other contributing causes generated costs which could not be anticipated, and while the contractor's accounting records are not kept in such a fashion as to yield the exact cost effect of such changes, it is estimated broadly that the price of the first 71 planes has increased approximately $20 million as a result of these factors.

ENGINEERING CHANGES

The contractor was launched upon the F-84F program in December 1950 with virtually no engineering data on the new plane. There was no basis for anticipating the heavy volume of changes that were to follow. For many months in the earlier phases of the program changes were, in effect, merely correction of preliminary or erroneous drawings as received from the prime design contractor and development of design as thinking changed. The greater part of such cost could not properly be handled as specific engineering changes. Starting roughly at the point when initial engineering data for the first F-84F plane was available, the obsolescence, vendors' claims, special tools and tool rework resulting from engineering changes, will cost about $7 million.

Another important cost effect of engineering changes, which is not perceivable on the books, although continuously flowing into the accounts comprising the cost of production is referred to more specifically herein under the caption "Material and labor."

MATERIAL AND LABOR

At the time of compiling the original estimate of plane prices there was virtually no engineering data available to the contractor as a dependable basis for determining material costs. It was necessary, therefore, to apply an overall cost per pound of airframe. The actual material cost incurred for 71 planes demonstrates that the formula was inadequate.

For the same reason the formula for direct labor, accepted in the aircraft industry where new planes are involved, was used. The contractor applied the "80-percent curve" based on 3.2 hours per pound at plane No. 250 in developing the labor cost. In retrospect it becomes clear that this formula, too, was optimistic.

Delaying factors described hereinbefore and engineering changes have caused substantial increases in subcontractor prices for parts and assemblies.

The labor cost has been substantially increased by the numerous production interruptions stemming from the very heavy volume of engineering changes. The contractor estimates that these factors account for approximately $14 million of the increased price for the first 71 planes.

Special tools

The contractor's original estimate for special tools was made without the benefit of engineering data on the new plane to be built. However, the emphasis placed on compliance with delivery schedules demanded prompt starting of tool construction.

Under direction of the Air Force the contractor provided production tooling of a design and durability to accommodate a production rate of 236 airplanes per month for a minimum period of 2 years. During the long stage of development of the F-84F design the numerous changes and corrections to tool drawings and to these hard tools themselves proved very costly.

It is important to recognize that all tools bearing any relationship to master gages could not be completed by the contractor and coordinated to make an acceptable product until those master gages were on site. The delayed availability of master gages which continued throughout the program caused considerable interruption and rework, and increased the tooling cost.

Due to the foregoing factors, the tool-construction workload was greatly increased; and, to cope with this situation, the contractor took a number of steps which necessarily increased tool costs; among other things, tool designers and toolmakers were recruited so as to shorten the tool-building period; a training program for about 250 men to augment the tool building was undertaken; and outside tool shops were used.

As a result of these conditions, the contractor estimates that the cost of special tools will be increased approximately $8 million.

CERTIFICATION

JULY 15, 1954.

I certify that the information contained herein for the period ending May 31, 1954, has been compiled from the records and books of the Buick-OldsmobilePontiac assembly division, General Motors Corp., in accordance with its regular accounting practices consistently applied; and, to the best of my knowledge and belief, the cost and expense are correctly stated as shown.

SCHEDULE A

Divisional Comptroller.

General Motors Corp. Buick-Oldsmobile-Pontiac assembly division-Proposed retroactive prices

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General Motors Corp., Buick-Oldsmobile-Pontiac assembly division—Analysis

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Material at invoice price from redeterminable1 allied suppliers:

Saginaw Steering Gear

Delco Products

Total

Allied commercial suppliers at invoice price:

Packard Electric

Buick Motor____

Allison division, Aeroproducts operations__

Total___

Total allied (to schedule A) –

1 The prices of these 2 divisions have been redetermined by the Air Force.

SCHEDULE A-2

2, 205, 555. 76 2,075, 000. 00

4,280, 555.76

5, 568. 31 1, 844. 71. 69,875.00

77, 288. 02

59, 053, 393. 33

General Motors Corp. Buick-Oldsmobile-Pontiac assembly division-Contract change notifications closed in first segment

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