Tesla Motors Inc (NASDAQ:TSLA)’s mass market Generation III Model E is anticipated to hit the roads sometime in 2017. Tesla CEO Elon Musk has said that it will be a truly mass market car with a price tag of around $35,000. The car would have a gross margin of 15%, and will offer 200-mile range. But according to Stanphyl Capital Management, that looks more like a pipe dream.

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Much of Tesla’s profits come from optional upgrades

For the fourth quarter 2013, Tesla Motors Inc (NASDAQ:TSLA) reported a net revenue of $761 million. It you exclude $13 million from Toyota Motor Corp (NYSE:TM) and Daimler AG (ETR:DAI) (FRA:DAI) (OTCMKTS:DDAIF) powertrain revenue, and another $15 million in regulatory credits, Model S sales generated $733 million. Divide that figure by 6892 cars, and you’ll get an average selling price (ASP) of $106,355 per car.

Tesla Motors Inc (NASDAQ:TSLA) earned 25.2% in non-GAAP gross margin on that $106,355 ASP, i.e., $26,801 per car. The basic Model S with 60kWh battery is priced at $70,000 excluding tax credits. Stanphyl Capital assumed that all upgrades above the basic price, i.e., $36,355 per car above the $70K price, generate 45% gross margin (35% margin on battery upgrades and 50% on other upgrades). That means $16,360 of Tesla’s $26,801 gross profit came from the battery and optional upgrades. That means the build cost of the most basic Model S is $59,559, and the gross margin is $10,441.

Elon Musk says that the Model S will be priced at $35,000. The most rumored numbers suggest that the battery costs $260/kWh. That means the battery of the Model S costs $15,600. The Model E is likely to have a 48kWh battery, which would cost $12,480. But the gigafactory should reduce the battery costs by about 35% to $8,112. So, Tesla Motors Inc (NASDAQ:TSLA) will be able to save ($15,600 – $8,112) $7,488 per Model E.

Tesla needs additional ways to preserve margins

Tesla Motors Inc (NASDAQ:TSLA) has to find sources of additional savings. Elon Musk has said that the Model E will be smaller than the current Model S. Stanphyl Capital Management estimates it would save about 400 pound/car in aluminum. At $0.75/pound, that generates $300 in savings per car. The Model E may also save 100 pounds in vinyls and over plastics. At $2/pound, that’s a $200 saving per car. The research firm says that producing the Model E is likely to require a lot of new tooling, because it won’t be able to use many of the Model S tools. Assuming there is at least some shared tooling, the electric vehicle maker can deduct an additional $100 per car in amortization costs. Tesla deducted $64 per car in amortization in 2013.

Tesla Motors Inc (NASDAQ:TSLA) can generate additional savings with smaller video screens, wheels, tires, and brakes. The research firm assumed this could add up to $400 in savings. Moreover, as the company grows, it will be able to negotiate better deals from component suppliers, which is projected to be a maximum of $3000 per car.

Will Tesla suffer a $13,000 loss per Model E?

The most basic Model S has a build cost of $59,559. Subtract $7488 in battery savings, $300 in aluminum savings, $200 in plastic savings, $164 in amortization savings, and $3000 in “bulk order” savings. So, the manufacturing cost of the most basic Model E would be around $48,007. So, how can Musk sell it for $35,000?

Tesla Motors Inc (NASDAQ:TSLA) shares were up 1.61% to $212.97 at 10:39 AM EST on Monday.