CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

TABLE OF CONTENTS

**6.1 INTRODUCTION** 

**.............................................................................................................. 6­1** 

**6.1.1 Baseline**  **Markups................................................................................................. 6­3** 

**6.1.2 Incremental**  **Markups**

**........................................................................................... 6­3** 

**6.1.3 Overall**  **Markups**

**.................................................................................................. 6­4** 

**6.2 BASIC**  **ASSUMPTIONS USED**  **TO ESTIMATE**  **WHOLESALER/DISTRIBUTOR**

**MARKUPS**

**......................................................................................................................... 6­4** 

**6.3 ESTIMATION**  **OF DISTRIBUTOR­WHOLESALER**  **MARKUPS.................................. 6­5** 

**6.4 SALES**  **TAX**

**....................................................................................................................... 6­7** 

**6.5 OVERALL**  **MARKUPS...................................................................................................... 6­8** 

**6.6 RESULTS** 

**........................................................................................................................... 6­8** 

**REFERENCES**

**............................................................................................................................ 6­9** 

LIST OF TABLES

**Table 6.3.1**  **Wholesaler/Distributor Expenses**  **and Markups** 

**...................................................... 6­6** 

**Table 6.4.1**  **State Sales**  **Tax Rates............................................................................................... 6­7** 

**Table 6.5.1**  **Baseline Markups**  **by Distribution**  **Channel and**  **Overall Average**  **Markup,**

**Including the Average**  **Sales Tax**  **Multiplier........................................................ 6­8**

**Table 6.5.2**  **Incremental Markups**  **by Distribution**  **Channel and**  **Overall Average** 

**Markup, Including**  **the Average**  **Sales Tax**  **Multiplier**

**......................................... 6­8** 

LIST OF FIGURES

**Figure 6.1.1**  **Distribution Channels**  **and Shares**  **for Refrigerated**  **Beverage Vending** 

**Machines.............................................................................................................. 6­2** 

**6­i 6­ii** CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

6.1 INTRODUCTION

**To carry**  **out the**  **life­cycle cost**  **(LCC) calculations**  **described in**  **chapter 8,**  **the**

**U.S. Department**  **of Energy**  **(DOE) needs**  **to determine**  **the cost**  **to the**  **customer of**  **baseline**

**refrigerated beverage**  **vending machines**  **(BVM). This**  **cost is**  **determined for**  **both baseline** 

**equipment and**  **more­efficient equipment**  **the customer**  **would purchase**  **following the** 

**promulgation of**  **new energy**  **conservation standards.**  **However, the**  **customer price**  **of such** 

**equipment is**  **not known**  **since it**  **depends on**  **how the**  **equipment is**  **purchased. The**  **manufacturer**

**selling price**  **(MSP) for**  **both baseline**  **equipment and**  **the more**  **efficient equipment**  **is determined** 

**in the**  **engineering analysis**  **(chapter 5).**  **By applying**  **a multiplier**  **called a**  **“markup” to**  **the MSP,** 

**DOE was**  **able to**  **estimate the**  **customer price**  **of equipment**  **purchased through**  **various**

**distribution channels.**  **This chapter**  **describes how**  **DOE derived**  **these markups.** 

**DOE determines**  **customer prices**  **for beverage**  **vending machines**  **from MSP**  **and**

**equipment price**  **markups using**  **industry balance**  **sheet data**  **and U.S.**  **Census Bureau**  **data. To** 

**determine price**  **markups, DOE**  **identifies distribution**  **channels for**  **equipment sales**  **and**

**determines the**  **existence and**  **amounts of**  **markups within**  **each distribution**  **channel. For**  **each**

**distribution channel,**  **DOE distinguishes**  **between “baseline**  **markups” applied**  **to the**  **MSP for** 

**baseline equipment**  **and “incremental**  **markups” applied**  **to the**  **incremental increase**  **in MSP**  **for**

**higher efficiency**  **equipment. Overall**  **baseline and**  **overall incremental**  **markups are**  **calculated**

**separately based**  **on the**  **product of**  **all baseline**  **markups at**  **each step**  **within a**  **distribution channel** 

**or the**  **product of**  **all incremental**  **markups at**  **each step**  **within a**  **distribution channel,**  **respectively.**

**The combination**  **of the**  **overall baseline**  **markup applied**  **to the**  **baseline MSP**  **and the**  **incremental**

**markups applied**  **to the**  **incremental increase**  **in MSP**  **for higher**  **efficiency equipment,**  **including**

**sales tax,**  **determines the**  **final customer**  **price.**

**The cost**  **to the**  **customer depends**  **on how**  **the customer**  **purchases the**  **equipment. DOE** 

**defined three**  **distribution channels,**  **as shown**  **in Figure**  **6.1.1, to**  **describe how**  **the equipment** 

**passes from**  **the manufacturer**  **to the**  **customer. In**  **the first**  **distribution channel,**  **the manufacturer** 

**sells the**  **equipment to**  **the bottler/distributor,**  **who in**  **turn installs,**  **operates and**  **maintains the** 

**equipment on­site**  **at the**  **user’s location.**  **In the**  **second and**  **third distribution**  **channels, the** 

**manufacturer sells**  **the equipment**  **to a**  **wholesaler/distributor, who**  **in turn**  **sells it**  **directly to**  **the**

**customer (vending**  **machine operator**  **or site**  **owner). The**  **site owner**  **purchases outright**  **a small** 

**percentage of**  **the machines**  **from the**  **distributor and**  **stocks and**  **maintains them**  **on­site.**

**Figure 6.1.1**  **also gives**  **the distribution**  **channel shares**  **(in percentage**  **of total**  **sales) through**  **each**

**of the**  **three distribution**  **channels. The**  **distribution channel**  **shares are**  **based on**  **information from** 

**the State**  **of the**  **Vending Industry**  **Report. 1** 

**6­1 BVM**  **Manufacturer**

**Wholesaler/Distributor**

**Site**

**Owner Vending**  **Machine**

**Operator Bottler/Distributor** 

**68 %**  **27 %**  **5%**

Figure 6.1.1 Distribution Channels and Shares for Refrigerated Beverage Vending

Machines

**The following**  **equation describes**  **how DOE**  **determined the**  **equipment price**  **if a** 

**customer (in**  **this case,**  **the bottler/distributor)**  **purchases directly**  **from the**  **manufacturer:**

EQP CUST = MSP BASE **x (1+**  **ST)** Eq. 6.1

**where**

EQP CUST **= equipment**  **price to**  **the customer**  **($),**

MSP BASE **= MSP**  **of baseline**  **equipment ($),**  **and**

ST

**= sales**  **tax rate.** 

**The following**  **equation describes**  **how DOE**  **determined the**  **equipment price**  **if a** 

**distributor sells**  **the equipment**  **to the**  **customer through**  **the wholesaler/distributor:** 

EQP CUST **=** MSP BASE **x** MU DIST **x (1+**  ST **)** Eq. 6.2

**where**

MU DIST **= wholesaler/distributor**  **markup.**

**The markup**  **multiplier to**  **the equipment**  **price is**  **thus lessened**  **for shorter**  **distribution**

**channels.**

**For each**  **of the**  **wholesaler/distributor markups**  **presented above,**  **DOE further** 

**differentiated between**  **a baseline**  **markup and**  **an incremental**  **markup, as**  **described below.**  **The**

**overall markup**  **describes the**  **product of**  **all the**  **markups plus**  **sales tax**  **within a**  **distribution**

**channel.**

**6­2**6.1.1 Baseline Markups

**DOE defined**  **baseline markups**  **as cost**  **multipliers that**  **relate the**  **purchase cost**  **to the** 

**selling price**  **for each**  **step in**  **the distribution**  **channel.**

**If sold**  **to a**  **customer by**  **the manufacturer,**  **the following**  **equation defines**  **the equipment** 

**price:**

EQP MFGR BASE = MSP BASE **x (1+ST)**  Eq. 6.3

**where**

EQP MFGR BASE **= bottler/distributor**  **price to**  **the customer**  **of baseline**  **equipment**

**($).**

**If sold**  **to a**  **customer by**  **a wholesaler/distributor:** 

EQP DIST BASE = MSP BASE **x** MU DIST BASE **x (1+ST)**  Eq. 6.4

**where**

EQP DIST BASE **= distributor**  **price to**  **the customer**  **of baseline**  **equipment ($),**  **and**

MU DIST BASE **= distributor**  **markup on**  **baseline equipment.** 

**The use**  **of the**  **markups results**  **in the**  **wholesaler/distributor (**  EQP DIST BASE **) prices**  **of**

**baseline BVM**  **equipment.**

6.1.2 Incremental Markups

**For the**  **purposes of**  **this analysis,**  **incremental markups**  **are cost**  **multipliers that**  **relate**

**incremental changes**  **in the**  **MSP of**  **higher efficiency**  **equipment (from**  **efficiency improvements)** 

**to changes**  **in the**  **distributor sales**  **price.**

**If sold**  **to a**  **bottler/distributor directly**  **by the**  **manufacturer, the**  **following equation**  **defines**

**the equipment**  **price:**

EQP MFGR INCR = MSP INCR **x (1+ST)**  Eq. 6.5

**where**

EQP MFGR INCR **= incremental**  **equipment price**  **to the**  **customer ($),**  **and**

MSP INCR **= change**  **in the**  **MSP of**  **higher efficiency**  **equipment brought**  **about**

**by an**  **increase in**  **efficiency due**  **to new**  **standards ($).** 

**If sold**  **by a**  **wholesaler/distributor directly**  **to a**  **customer:**

EQP DIST INCR **=** MFG INCR **x** MU DIST INCR **x (1+**  **ST)** Eq. 6.6

**where**

EQP DIST INCR **= incremental**  **wholesaler/distributor price**  **to the**  **customer ($),**  **and**

**6­3**MU DIST INCR **= incremental**  **wholesaler/distributor markup.** 

**In equation**  **6.6, the**  MU DIST INCR **term refers**  **to the**  **incremental wholesaler/distributor** 

**markup that**  **is applied**  **to the**  **incremental MSP.**  **The use**  **of the**  **incremental markup**  **results in**  **the**

**incremental wholesaler/distributor**  **(** EQP DIST **) price.** 

6.1.3 Overall Markups

**Overall markups,**  **including both**  **overall baseline**  **and overall**  **incremental markups,**  **relate**

**the MSP**  **to the**  **customer price**  **as indicated**  **by the**  **following equations:** 

EQP CUST BASE **=** MSP BASE **x (**  WT MFGR BASE + WT DIST BASE **x** MU DIST BASE **) x**  **(1+** ST **)**

**=** MSP BASE **x (1+**  MU OVERALL BASE **)** Eq. 6.7

EQP CUST INCR **=** MSP INCR **x** (WT MFGR INCR + WT DIST INCR **x** MU DIST INCR **) x**  **(1+** ST **)**

**=** MFG INCR **x** MU OVERALL INCR Eq. 6.8

EQP CUST = EQP CUST BASE + EQP CUST INCR Eq. 6.9

**where**

MU OVERALL BASE **= overall**  **weighted baseline**  **markup that**  **is the**  **product of** 

**all the**  **weights and**  **baseline markups**  **for each**  **step of**  **the distribution**  **channel,**

MU OVERALL INCR **= overall**  **weighted incremental**  **markup that**  **is the**  **product**

**of all**  **the weights**  **and incremental**  **markups for**  **each step**  **of the**  **distribution**

**channel,**

EQP CUST BASE **= baseline**  **customer price**  **($),**

EQP CUST INCR **= incremental**  **customer price**  **($),**

EQP CUST **= total**  **customer price**  **($),**

WT MFGR BASE **= weight**  **(percent) of**  **baseline equipment**  **sales direct**  **to customers,** 

WT DIST BASE **= weight**  **(percent) of**  **baseline equipment**  **sales through** 

**wholesalers,**

WT MFGR INCR **= weight**  **(percent) of**  **higher efficiency**  **equipment sales**  **direct to** 

**customers, and** 

WT DIST INCR **= weight**  **(percent) of**  **higher efficiency**  **equipment sales**  **through**

**wholesalers.**

**The use**  **of the**  **overall baseline**  **and overall**  **incremental markups**  **results in**  **the baseline** 

**customer price**  **(** EQP CUST BASE **) and**  **the incremental**  **customer price**  **(** EQP CUST INCR **). For**  **a**

**particular higher**  **efficiency level**  **that increases**  **the MSP**  **of equipment,**  **the total**  **price of** 

**equipment to**  **the customer**  **(** EQP CUST **) is**  **the sum**  **of the**  **baseline customer**  **price (**  EQP CUST BASE **)**

**and the**  **incremental customer**  **price (**  EQP CUST INCR **).**

6.2 BASIC ASSUMPTIONS USED TO ESTIMATE WHOLESALER/DISTRIBUTOR

MARKUPS

**DOE based**  **the wholesaler/distributor**  **markups on**  **U.S. Census**  **Bureau data**  **for the** 

**“Other commercial**  **equipment merchant**  **wholesaler” segment**  **of durable**  **goods and**  **merchant**

**6­4 wholesalers**  **category of**  **Wholesale Trade.**  **Three key**  **assumptions used**  **to estimate**  **markups for** 

**the BVM**  **wholesaler/distributor industry**  **were:**

**1. The**  **data accurately**  **represent the**  **various costs**  **incurred by**  **firms distributing**  **and**

**installing BVM**  **equipment.**

**2. The**  **costs can**  **be divided**  **into two**  **categories: (1)**  **costs that**  **vary in**  **proportion to**  **the MSP** 

**of BVM**  **equipment (variable**  **costs), and**  **(2) costs**  **that do**  **not vary**  **with the**  **MSP of**  **BVM**

**equipment (fixed**  **costs).**

**3. Wholesaler/Distributor**  **prices vary**  **in proportion**  **to the**  **stated wholesaler/distributor**  **costs.**

**In support**  **of the**  **first two**  **assumptions, the**  **cost data**  **are categorized**  **correctly to**  **reflect**

**the direct**  **costs to**  **purchase or**  **install the**  **equipment, operating**  **labor and**  **occupancy costs,**  **and**

**other operating**  **costs and**  **profit.**

**Although the**  **BVM wholesaler/distributors**  **may handle**  **multiple commodity**  **lines**

**(including non­refrigerated**  **vending machines**  **and other**  **equipment), the**  **data provide**  **the most** 

**accurate available**  **indication of**  **BVM equipment**  **costs.**

**DOE searched,**  **but did**  **not find**  **data on**  **two topics**  **that relate**  **to the**  **price determined**  **by**

**the markup**  **analysis. The**  **first is**  **the division**  **and application**  **of fixed**  **and variable**  **costs, and**  **the**

**second is**  **the level**  **of competition.** 

**In the**  **case of**  **the division**  **and application**  **of fixed**  **and variable**  **costs to**  **determine**

**baseline and**  **incremental markups,**  **DOE relied**  **upon prior**  **analysis of**  **the HVAC**  **wholesalers,**

**contractors, and**  **consultants, including**  **information obtained**  **from the**  **trade literature.**  **2,3 This** 

**analysis indicates**  **that wholesaler**  **and contractor**  **markups vary**  **according to**  **the quantity**  **of labor** 

**and materials**  **used to**  **distribute and**  **install appliances,**  **with markups**  **on labor**  **tending to**  **be much** 

**larger than**  **markups on**  **materials. The**  **analysis implies**  **that these**  **distribution channel**  **markups**

**vary more**  **with sales**  **volume than**  **with other**  **factors, including**  **appliance efficiency.** 

**Distribution channel**  **labor inputs**  **also vary**  **more with**  **sales volume**  **than with**  **appliance cost**  **or**

**efficiency. DOE**  **assumed a**  **division of**  **costs between**  **those that**  **do not**  **scale with**  **the MSP** 

**(labor and**  **occupancy costs),**  **and those**  **that do**  **(operating costs**  **and profit).**  **This division**  **of costs** 

**led to**  **the estimation**  **of wholesaler/distributor**  **markups as**  **described below.** 

**In the**  **case of**  **the BVM**  **industry, the**  **level of**  **competition among**  **the wholesaler/** 

**distributors of**  **BVM equipment**  **and customer**  **demand for**  **BVM equipment**  **is relatively**  **inelastic**

**(i.e., the**  **demand is**  **not expected**  **to decrease**  **significantly with**  **an increase**  **in price**  **of the** 

**equipment). The**  **large number**  **of wholesaler**  **firms listed**  **in the**  **U.S. Census**  **Bureau data**  **(2002)**

**indicates that**  **the market**  **is relatively**  **competitive in**  **nature, as**  **there are**  **about 450** 

**wholesaler/distributors of**  **BVM equipment.**  **4 Following**  **standard economic**  **theory, competitive** 

**firms facing**  **inelastic demand**  **either set**  **prices in**  **line with**  **costs or**  **quickly go**  **out of**  **business. 5** 

6.3 ESTIMATION OF DISTRIBUTOR­WHOLESALER MARKUPS

**DOE derived**  **markups for**  **wholesaler/distributors from**  **U.S. Census**  **Bureau data**  **(2002)**

**for Other**  **Commercial Equipment**  **Merchant Wholesalers**  **(North American**  **Industry**

**6­5 Classification**  **System 423440).**  **This sector**  **includes establishments**  **primarily engaged**  **in**

**distributing and**  **wholesaling refrigerated**  **beverage vending**  **machines and**  **other equipment**  **to**

**restaurants and**  **hotels (NAICS**  **4234401) and**  **stores (NAICS**  **4234402). The**  **U.S. Census**  **Bureau**

**data for**  **this sector**  **include revenue**  **and expense**  **data in**  **total dollars**  **rather than**  **in typical**  **values**

**for an**  **average or**  **representative business.**  **Because of**  **this, DOE**  **assumed that**  **the total**  **dollar**

**values that**  **the U.S.**  **Census Bureau**  **reported, once**  **converted to**  **a percentage**  **basis, represented** 

**revenues and**  **expenses for**  **an average**  **or typical**  **contracting business.**  **Table 6.3.1**  **summarizes**

**the expenses**  **for wholesaler/distributors,**  **as expenses**  **per dollar**  **sales revenue,**  **in the**  **first data** 

**column (appendix**  **C contains**  **dollar values**  **from the**  **survey). The**  **direct cost**  **of sales**  **represents**

**about $0.69**  **per dollar**  **sales revenue**  **to the**  **wholesaler/distributor. Labor**  **expenses account**  **for**

**$0.13 per**  **dollar sales**  **revenue, occupancy**  **expenses and**  **other operating**  **expenses account**  **for**

**$0.10, and**  **profit accounts**  **for $0.09**  **per dollar**  **sales revenue.** 

Table 6.3.1 Wholesaler/Distributor Expenses and Markups

Description Wholesale Firm Expenses or Revenue

Per Dollar

Sales Revenue Per Dollar Cost

of Goods Sold

Direct Cost of Equipment Sales: **Cost of**  **goods sold** 

Labor Expenses: **Salaries and**  **benefits**

Occupancy Expense: **Rent, maintenance,**  **and utilities** 

Other Operating Expenses: **Depreciation, advertising,**  **and insurance** 

Profit **$0.69**

**$0.13**

**$0.10**

**$0.09 $1.00** 

**$0.19**

**$0.07***

**$0.07***

**$0.13**

Baseline Markup ( MU WHOLE BASE ): **Revenue per**  **dollar cost**  **of goods**  **sold** 1.46

Incremental Markup ( MU WHOLE INCR ): **Increased revenue**  **per dollar**  **increase cost**  **of goods**  **sold** 1.20

**Source: U.S.**  **Census Bureau.**  **December 2005.**  **Wholesale Trade,**  **Miscellaneous Subjects:**  **2002. EC02­42SX­SB** 

**Table 4.**  **Detailed Type**  **of Operation**  **for the**  **United States:**  **2002**

**U.S. Census**  **Bureau. December**  **2005. Wholesale**  **Trade, Miscellaneous**  **Subjects: 2002.**  **EC02­42SX­SB**

**Table 6.**  **Gross Margin**  **and Its**  **Components for**  **Merchant Wholesalers**  **for the**  **United States:**  **2002**

**U.S. Census**  **Bureau. December**  **2005. Wholesale**  **Trade, Miscellaneous**  **Subjects: 2002.**  **EC02­42SX­SB**

**Table 7.**  **Gross Profit**  **and Its**  **Components for**  **Merchant Wholesalers**  **for the**  **United States:**  **2002**

***Because data**  **were not**  **available to**  **calculate the**  **individual values**  **for Occupancy**  **and Other**  **Operating Expenses**  **in the**  **“Per**

**Dollar Cost**  **of Goods**  **Sold” column,**  **the values**  **were calculated**  **from the**  **“Per Dollar**  **Sales Revenue”**  **value, by**  **arbitrarily**

**dividing the**  **total in**  **half. Evidence**  **from other**  **rulemakings indicates**  **that the**  **Occupancy Expense**  **value in**  **the “Per**  **Dollar Cost** 

**of Goods**  **Sold” column**  **is often**  **slightly lower**  **than the**  **value for**  **Other Operating**  **Expenses. If**  **this were**  **the case**  **in this**  **category,**

**then the**  **effect would**  **be to**  **understate the**  **incremental by**  **1 or**  **2 points**  **(i.e., it**  **may be**  **1.21 or**  **1.22 instead**  **of 1.20).** 

**DOE converted**  **these expenses**  **per dollar**  **sales into**  **revenue per**  **dollar cost**  **of goods**  **sold,**

**by dividing**  **each figure**  **in the**  **first data**  **column by**  **$0.69. The**  **data in**  **the last**  **column show**  **that,**

**for every**  **$1.00 the**  **wholesaler/distributor spends**  **on equipment**  **costs, the**  **wholesaler/distributor**

**earns $1.00**  **in sales**  **revenue to**  **cover the**  **equipment cost,**  **$0.19 to**  **cover labor**  **costs, $0.07**  **to**

**cover occupancy**  **expenses, $0.07**  **for other**  **operating expenses,**  **and $0.13**  **in profits.**  **This totals** 

**$1.46 in**  **sales revenue**  **earned for**  **every $1.00**  **spent on**  **equipment costs.**  **This results**  **in a** 

**wholesaler/distributor baseline**  **markup (**  MU DIST BASE **) of**  **1.46 ($1.46**  **÷ $1.00).** 

**DOE was**  **also able**  **to use**  **the data**  **in the**  **last column**  **in Table**  **6.3.1 to**  **estimate the** 

**incremental markups**  **by separating**  **the fixed**  **and variable**  **costs. For**  **example, if**  **all of**  **the other** 

**costs scale**  **with the**  **equipment price**  **(i.e., all**  **costs are**  **variable), the**  **increase in** 

**wholesaler/distributor price**  **will be**  **$1.46, implying**  **that the**  **incremental markup**  **is 1.46,**  **or the** 

**same as**  **the baseline**  **markup. However,**  **if none**  **of the**  **other costs**  **are variable,**  **then a**  **$1.00**

**increase in**  **the equipment**  **price will**  **lead to**  **a $1.00**  **increase in**  **the wholesaler/distributor**  **price,**

**6­6 for**  **an incremental**  **markup of**  **1.0. DOE**  **assumes the**  **labor and**  **occupancy costs**  **to be**  **fixed and** 

**the other**  **operating costs**  **and profit**  **to scale**  **with the**  **equipment price**  **(i.e., be**  **variable). In**  **this**

**case, for**  **a $1.00**  **increase in**  **the equipment**  **price, the**  **wholesaler/distributor price**  **will increase**  **by**

**$1.20, giving**  **a wholesaler/distributor**  **incremental markup**  **(** MU DIST INCR **) of**  **1.20 ($1.20**  **÷ $1.00).** 

**DOE recognizes**  **that there**  **is a**  **possibility of**  **case­to­case deviation**  **in the**  **markups**

**developed from**  **the above**  **financial data.**  **Based on**  **the analysis**  **of U.S.**  **Census Bureau**  **data for** 

**wholesalers, DOE**  **calculated a**  **standard deviation**  **of 12.1**  **percent (see**  **appendix C**  **for further** 

**details). DOE**  **assumed that**  **the variation**  **determined for**  **the baseline**  **markup applied**  **to the** 

**incremental markup**  **as well.**  **For the**  **baseline markup**  **of 1.46,**  **a standard**  **deviation of**  **12.1**

**percent translates**  **into an**  **absolute value**  **of 0.056.**  **For the**  **incremental markup**  **of 1.20,**  **a**

**standard deviation**  **of 12.1**  **percent translates**  **into an**  **absolute value**  **of 0.024.** 

**The national**  **level census**  **data on**  **distribution of**  **BVM units**  **suggest that**  **over 95**  **percent**

**of new**  **units sold**  **pass through**  **bottler/distributors or**  **wholesaler/distributors. Uncertainty**  **in the** 

**quantitative value**  **of markups**  **is introduced**  **into the**  **LCC analysis**  **through the**  **use of**  **the Excel** 

**spreadsheet based**  **Crystal Ball**  **program. DOE**  **applied the**  **same baseline**  **and incremental**  **markup**

**to all**  **sales of**  **BVM units**  **passing through**  **wholesaler/distributors.**

6.4 SALES TAX

**The sales**  **tax represents**  **State and**  **local sales**  **taxes that**  **are applied**  **to the**  **customer price** 

**of BVM**  **units. The**  **sales tax**  **is a**  **multiplier that**  **increases the**  **customer equipment**  **price. DOE** 

**derived sales**  **taxes representative**  **of the**  **combined State**  **and local**  **sales tax**  **rates from**  **the Sales** 

**Tax Clearinghouse,**  **6 shown**  **in Table**  **6.4.1. The**  **State level**  **combined tax**  **rates can**  **be applied**  **to**

**the estimated**  **value of**  **State level**  **BVM equipment**  **shipments to**  **obtain the**  **total purchase**  **cost to** 

**the customer**  **located in**  **any State.** 

Table 6.4.1 State Sales Tax Rates

State Combined

State and Local

Tax Rate [%] State Combined

State and Local

Tax Rate [%] State Combined

State and

Local Tax Rate

[%]

**Alabama 8.05**  **Kentucky 6.00**  **North Dakota**  **5.50**

**Alaska 1.15**  **Louisiana 8.60**  **Ohio 6.75** 

**Arizona 7.65**  **Maine 5.00**  **Oklahoma 8.15** 

**Arkansas 8.00**  **Maryland 5.00**  **Oregon 0.00** 

**California 7.95**  **Massachusetts 5.00**  **Pennsylvania 6.25** 

**Colorado 6.15**  **Michigan 6.00**  **Rhode Island**  **7.00**

**Connecticut 6.00**  **Minnesota 6.70**  **South Carolina**  **5.80**

**Delaware 0.00**  **Mississippi 7.00**  **South Dakota**  **5.25**

**Dist. of**  **Columbia 5.75**  **Missouri 6.85**  **Tennessee 9.40** 

**Florida 6.70**  **Montana 0.00**  **Texas 7.95** 

**Georgia 6.90**  **Nebraska 6.30**  **Utah 6.45** 

**Hawaii 4.00**  **Nevada 7.50**  **Vermont 6.00** 

**Idaho 5.05**  **New Hampshire**  **0.00 Virginia**  **5.00**

**Illinois 7.55**  **New Jersey**  **6.00 Washington**  **8.45**

**Indiana 6.00**  **New Mexico**  **6.55 West**  **Virginia 6.00** 

**Iowa 6.60**  **New York**  **8.25 Wisconsin**  **5.40**

**Kansas 6.95**  **North Carolina**  **7.05 Wyoming**  **5.35**

**6­7 The**  **distribution of**  **sales tax**  **rates ranges**  **from a**  **minimum of**  **zero percent**  **to a**  **maximum**

**of 9.4**  **percent with**  **a mean**  **value of**  **6.8 percent.**  **DOE applied**  **the average**  **sales tax**  **to the** 

**customer equipment**  **price irrespective**  **of the**  **distribution channel**  **and the**  **market in**  **which the** 

**customer is**  **located.**

6.5 OVERALL MARKUPS

**DOE multiplied**  **the direct**  **and wholesaler/distributor**  **markups described**  **above by**  **the**

**average sales**  **tax multiplier**  **to obtain**  **the overall**  **baseline and**  **incremental markups**  **shown in** 

**Table 6.5.1**  **and Table**  **6.5.2. DOE**  **based overall**  **markups on**  **one of**  **two distribution**  **channels**

**according to**  **how the**  **equipment is**  **purchased: either**  **directly or**  **through a**  **wholesaler/distributor,**

**and the**  **State into**  **which the**  **BVM unit**  **is delivered.**  **Table 6.5.1**  **presents two**  **markups for**  **the**

**overall baseline**  **markup and**  **the overall**  **weighted average**  **baseline markup,**  **and Table**  **6.5.2**

**presents the**  **same information**  **for overall**  **incremental markups.** 

Table 6.5.1 Baseline Average Markups by Distribution Channel and Overall Average

Markup, Including the Sales Tax Multiplier

Manufacturer Direct Wholesaler/Distributor Overall Weighted

Average

Markup **1.0 1.46**  **1.147**

Sales Tax Multiplier **1.068 1.068**  **1.068**

Overall Markup **1.068 1.559**  **1.226**

Table 6.5.2 Incremental Average Markups by Distribution Channel and Overall Average

Markup, Including the Sales Tax Multiplier

Manufacturer Direct Wholesaler/Distributor Overall Weighted

Average

Markup **1.0 1.20**  **1.064**

Sales Tax Multiplier **1.068 1.068**  **1.068**

Overall Markup **1.068 1.282**  **1.137**

**DOE used**  **the overall**  **markups to**  **estimate the**  **customer price**  **of baseline**  **equipment,**

**given the**  **manufacturer cost**  **of baseline**  **equipment. For**  **example, if**  **the MSP**  **of a**  **baseline BVM** 

**unit is**  **$1,000, DOE**  **can multiply**  **this by**  **the average**  **overall baseline**  **markup to**  **estimate that**  **the**

**baseline customer**  **price of**  **the BVM**  **unit sold**  **is $1,559.**  **Similarly, DOE**  **used the**  **overall**

**incremental markup**  **to estimate**  **changes in**  **the customer**  **price, given**  **changes in**  **the MSP**  **above**

**the baseline**  **due to**  **increases in**  **equipment efficiency.**  **For example,**  **if a**  **new standard**  **increases**

**the BVM**  **MSP by**  **$100, DOE**  **can multiply**  **this price**  **($100) by**  **the average**  **overall incremental** 

**markup (1.282)**  **to estimate**  **a customer**  **price increase**  **of $128.** 

6.6 RESULTS

**The overall**  **baseline and**  **overall incremental**  **markups are**  **presented in**  **section 6.5.**  **These**

**markups will**  **be used**  **with the**  **MSPs to**  **generate customer**  **prices for**  **refrigerated beverage** 

**vending machines.**  **Supporting data**  **for the**  **calculation of**  **baseline and**  **incremental markups**  **are**

**provided in**  **appendix C.** 

**6­8**REFERENCES

**1 State**  **of the**  **Vending Industry**  **Report. 2006.**  **"Operators slow**  **to invest;**  **sales rise**  **3 points**  **in**

**2005", Automatic**  **Merchandiser, www.amonline.com**  **(Accessed on**  **June 25,**  **2007), pp.**  **40­**

**62. August**  **2006.**

**2 Lawrence**  **Berkeley National**  **Laboratory (LBNL)**  **2004. “An**  **Analysis of**  **Price Determination** 

**and Markups**  **in the**  **Air­Conditioning and**  **Heating Equipment**  **Industry.” LBNL­52791** 

**3 Mark**  **Metoyer as**  **reported in**  **Mark Skaer,**  **“What should**  **you charge?**  **Try These**  **Tested**

**Formulas,” Air**  **Conditioning, Heating**  **and Refrigerator**  **News, March**  **26, 2001.** 

**4 U.S.**  **Census Bureau.**  **2002. 2002**  **Economic Census**  **Release Date:**  **12/3/2004**

**Sector 42:**  **Wholesale Trade:**  **Industry Series:**  **Product Lines**  **by Kind**  **of Business**  **for the** 

**United States:**  **2002 at**  **http://factfinder.census.gov/servlet/IBQTable?_bm=y&­**

**MFG=10971:42&­ds_name=EC0242I3&­_lang=en (Accessed**  **on April**  **16, 2007.)** 

**5 Pindyck,**  **R. and**  **D. Rubinfield.**  **2000. Microeconomics,**  **Prentice­Hall.**

**6 The**  **Sales Tax**  **Clearinghouse. https://thestc.com/STRates.stm**  **(Accessed on**  **June 25,**  **2007.)**

**6­9**