CHAPTER 7. MARKUPS FOR EQUIPMENT PRICE DETERMINATION 

TABLE OF CONTENTS 

7.1 INTRODUCTION ........................................................................................................... 7-1 

7.1.1 Distribution Channels .......................................................................................... 7-1 

7.1.2 Markup Calculation Procedure ............................................................................ 7-2 

7.2 DISTRIBUTOR AND RETAIL MARKUPS.................................................................. 7-2 

7.3 ORIGINAL EQUIPMENT MANUFACTURER MARKUP.......................................... 7-7 

7.4 CONTRACTOR OR INSTALLER MARKUP............................................................... 7-8 

7.5 SALES TAXES ............................................................................................................... 7-8 

7.6 OVERALL MARKUP..................................................................................................... 7-9 

7.7 SHIPPING COSTS ........................................................................................................ 7-11 

LIST OF TABLES 

Table 7.2.1 Data Used to Calculate Wholesale Markups ....................................................... 7-5 

Table 7.2.2 Data Used to Calculate Retail Markups............................................................... 7-6 

Table 7.5.1 Average Sales Tax Rates by Census Division and Large State ........................... 7-9 

Table 7.6.1 Summary of Markups for Small Motors............................................................ 7-10 

LIST OF FIGURES 

Figure 7.1.1 Distribution Channels for Small Electric Motors ................................................ 7-1 

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CHAPTER 7. MARKUPS FOR EQUIPMENT PRICE DETERMINATION 

7.1 INTRODUCTION 

To carry out the engineering and life-cycle cost (LCC) analyses, DOE needed to 

determine the cost to the customer of a baseline product and the cost of more-efficient units. By 

applying multipliers called “markups” to the manufacturers’ selling prices estimated in the 

engineering analysis, DOE estimated the end user prices for baseline models and more-efficient 

equipment. 

7.1.1 Distribution Channels 

The appropriate markups for determining the end user equipment price depend on the 

type of distribution channels through which products move from manufacturers to purchasers. 

At each point in the distribution channel, companies mark up the price of the equipment to cover 

their business costs and profit margin. 

Because most small electric motors are used as components in larger pieces of 

equipment, much of the market passes through original equipment manufacturers (OEMs) who 

design, assemble and brand products that may contain small electric motors. OEMs in turn 

obtain their motors either directly from the motor manufacturers or from manufacturers via 

distributors. 

Based on market research, DOE defined three distribution channels for small electric 

motors, and estimated their respective shares of shipments. Two channels exist for motors 

installed in new equipment: (1) from manufacturers to OEMs and then to end-users through 

equipment distributors or retailers—65 percent of shipments; and (2) from manufacturers to 

wholesale motor distributors to OEMs and then to end-users through equipment distributors or 

retailers—30 percent of shipments. The third channel refers to replacement or spare motors: (3) 

from manufacturers to wholesale motor distributors to end-users through distributors or 

retailers—5 percent of shipments. DOE estimates the proportion of shipments through each 

distribution channel based on public comments made by the National Electrical Manufacturers 

Association (NEMA). 

Figure 7.1.1 Distribution Channels for Small Electric Motors 

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In addition to these distribution chain markups, DOE estimated and added the shipping 

costs of the motors. This is a significant factor because more efficient motors are often larger ad 

heavier than less efficient motors, so this is a cost that needs to be included in an accurate cost 

analysis. 

7.1.2 Markup Calculation Procedure 

As just discussed, at each point in the distribution channel, companies mark up the price 

of the equipment to cover their business costs and profit margin. In financial statements, gross 

margin is the difference between the company revenue and the company cost of sales or cost of 

goods sold (CGS). Inputs for calculating the gross margin are all corporate costs—including 

overhead costs (sales, general, and administration); research and development (R&D) and 

interest expenses; depreciation, and taxes—and profits. In order for sales of a product to 

contribute positively to company cash flow, the product’s markup must be greater than the 

corporate gross margin. Individual products may command a lower or higher markup, 

depending on their perceived added value and the competition they face from similar products in 

the market. 

In developing markups for OEMs, distributors and retailers, DOE obtained data about the 

revenue, CGS, and expenses of firms that produce and sell the products of interest. DOE’s 

approach categorizes the expenses into two categories: labor-scaling costs (LSC), which are fixed 

labor and occupancy expenses that increase in proportion to the amount of labor required to 

produce or sell the product, and non-labor-scaling costs (NLSC), which are variable operating 

costs that do not scale with labor and vary in proportion to CGS. Together, LSC and NLSC 

represent the gross margin. 

For each step in equipment distribution, DOE estimated both a baseline markup and an 

incremental markup. For small electric motors, DOE understands that no increase in distribution 

labor is necessary for the distribution of more efficient equipment, while the non-labor-scaling 

cost does increase with increasing equipment costs. This allowed DOE to estimate the 

incremental markup given a breakdown of distribution and manufacturing business expenses for 

a particular industry. 

In the case of OEM manufacturing costs, DOE did not have detailed industry component 

costs, but it did have time series of total sales payroll and material costs for a variety of related 

industries. In this case, DOE performed a regression analysis to estimate incremental markups 

on material input costs. 

7.2 DISTRIBUTOR AND RETAIL MARKUPS 

DOE based its distributor and retail markups on financial data from the U.S. Census 

Business Expenses Survey (BES). DOE organized the financial data into balance sheets that 

break down cost components incurred by firms that sell equipment with small motors or 

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replacement motors.a The key assumptions that DOE used to estimate the retailer and distributor 

markups using these financial data were: 

1.	 The balance sheets faithfully represent the various average costs incurred by firms 

distributing motors and equipment containing motors. 

2.	 These costs can be divided into two categories: 

a.	 Costs that vary in proportion to the manufacturer sales price (variable costs); and 

b.	 Costs that do not vary with the manufacturer sales price (fixed costs). 

3.	 Retailer and distributor sales prices vary in proportion to retailer and distributor costs that 

are included in the balance sheets. 

In support of the first assumption, the balance sheets itemize firm costs into a number of 

expense categories, including CGS, operating labor and occupancy costs, and other operating 

costs and profit. Although retailers and distributors tend to handle multiple commodity lines, the 

data provide the most accurate available indication of distributor expenses. 

In the discussion that follows, DOE uses a division of costs between those that do not 

scale with the manufacturer sales price (fixed costs—labor and occupancy expenses referred to 

above as LSC), and those that do scale (variable costs—operating expenses and profit referred to 

above as NLSC). 

In support of the third assumption, the retailer and distributor industries are relatively 

competitive, and end user demand for motors and equipment with motors is relatively inelastic— 

i.e., the demand is not expected to decrease significantly with a relatively small increase in price. 

Following standard economic theory, competitive firms facing inelastic demand either set prices 

in line with costs or quickly go out of business.i 

Using the above assumptions, DOE developed baseline and incremental markups and 

applied them in calculating end user equipment prices from manufacturer sales prices. DOE 

used the baseline markups, which cover all of a retailer’s or distributor’s costs (i.e., both LSC and 

NLSC), to determine the sales price of baseline models. The baseline markup relates the 

manufacturer sales price to the retailer sales price or distributor sales price. DOE considers 

baseline models to be equipment sold under existing market conditions (i.e., without new energy 

efficiency standards). DOE calculated the baseline markup (MUBASE) for retailers and 

distributors using the following equation: 

CGS RTL / DIST + GM RTL / DIST CGS RTL / DIST + (LSCRTL / DIST + NLSCRTL / DIST ) MU BASE = = CGS	 CGS RTL / DIST	 RTL / DIST 

a

 The distributors to whom these financial data refer handle multiple commodity lines. 

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Where: 

MUBASE = baseline retailer or distributor markup, 

CGSRTL/DIST = retailer’s or distributor’s cost of goods sold, 

GMRTL/DIST = retailer’s or distributor’s gross margin, 

LSCRTL/DIST = retailer’s or distributor’s labor-scaling costs, and 

NLSCRTL/DIST = retailer’s or distributor’s non-labor-scaling costs. 

Incremental markups cover only those costs that scale with a change in the 

manufacturer’s sales price (i.e., NLSC). Incremental markups are coefficients that relate the 

change in the manufacturer sales price of higher-efficiency models to the change in the retailer or 

distributor sales price. DOE considers higher-efficiency models to be equipment sold under 

market conditions with new efficiency standards. It calculated the incremental markup (MUINCR) 

for retailers and distributors using the following equation: 

MU CGS RTL / DIST + NLSCRTL / DIST

INCR = CGSRTL / DIST 

Where: 

MUINCR = incremental retailer or distributor markup, 

CGSRTL/DIST = retailer’s or distributor’s cost of goods sold, and 

NLSCRTL/DIST = retailer’s or distributor’s non-labor-scaling costs. 

DOE used financial data from the BES for the categories “Electrical Goods Merchant 

Wholesalers” and “Machinery, Equipment, and Supplies Merchant Wholesalers” to calculate 

markups used by wholesale distributors of motors to OEMs and by distributors of equipment 

containing small motors or replacement motors, respectively. Table 7.2.1 shows the data from 

the BES and the markups DOE estimated using the procedures described above. 

DOE used financial data from the BES, in the “Building materials, hardware, garden 

supply and mobile home dealers” category to calculate markups used by retail outlets that sell 

equipment containing motors or replacement motors.ii Table 7.2.2 shows the BES data that DOE 

used and the markups that DOE estimated following the procedures described above. 

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Table 7.2.1 Data Used to Calculate Wholesale Markups 

Item Equipment Wholesale 

(Million Dollars) 

Motors Wholesale 

(Million Dollars) 

Sales (revenue) 225425 205688 

Cost of Goods Sold (CGS) 158097 160435 

Gross Margin (GM) 67328 45253 

Operating Expenses 52498 42110 

Labor-Scaling Costs (LSC): 

Annual Payroll 25804 19402

 Fringe benefits 4343 3233

 Contract labor 750 954 

 Taxes and license fees 823 450 

 Lease and rental payments 2932 1980 

 Telephone and other communications 1185 958 

 Purchased Utilities 706 478

 Contract work 151 269 

 Purchased repair and maintenance services 826 436 

 Commissions paid 963 1309

 LCS Subtotal: 38483 29469 

Non-Labor-Scaling Costs (NLSC): 

Depreciation and Amortization 2650 1947 

Office Supplies 885 663 

 Packaging and Other Materials 346 425 

Advertising Services 959 1842

 Legal Services 277 292 

Accounting, Auditing, and Bookkeeping 346 215

 Computer Related Services 403 498 

 Other Operating Expenses 8149 6759 

Net Profit Before Taxes 14830 3143

 NLSC Subtotal: 28845 15784 

Baseline Markup (MUBASE) = (CGS+GM)/CGS 1.43 1.28 

Incremental Markup (MUINCR) = (CGS+NLSC)/CGS 1.18 1.10 

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Table 7.2.2 Data Used to Calculate Retail Markups 

Item Million Dollars 

Sales (revenue) 148397 

Cost of Goods Sold (CGS) 102922 

Gross Margin (GM) 45475 

Operating Expenses 3664 

Labor-Scaling Costs (LSC) 

Annual Payroll 17740

 Fringe benefits 3212

 Contract labor 941 

 Taxes and license fees 728 

 Lease and rental payments 2474 

 Telephone and other communications 601 

 Purchased Utilities 918

 Contract work 0 

 Purchased repair and maintenance services 840 

 Commissions paid 0 

 LCS Subtotal: 27454 

Non-Labor-Scaling Costs (NLSC) 

Depreciation and Amortization 1783 

Office Supplies 488 

 Packaging and Other Materials 264 

Advertising Services 1321

 Legal Services 159 

Accounting, Auditing, and Bookkeeping 196

 Computer Related Services 179 

 Other Operating Expenses 4820 

Net Profit Before Taxes 8811

 NLSC Subtotal: 18021 

Baseline Markup (MUBASE) = (CGS+GM)/CGS 1.44 

Incremental Markup (MUINCR) = (CGS+NLSC)/CGS 1.18 

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7.3 ORIGINAL EQUIPMENT MANUFACTURER MARKUP 

DOE calculated the OEM markup as follows: 

SALES = MU . BASE PAY + MAT + CAP 

Where: 

SALES = value of shipments, 

PAY = payroll expenses, 

MAT = material input expenses, 

CAP = capital expenses, 

MUBASE = baseline markup. 

The 2002 Economic Census Manufacturing Industry Series reports the payroll 

(production and total), cost of materials, capital expenditures, and total value of shipments for 

manufacturers of various types of machinery. Six years of data are reported for each 

manufacturer type. DOE collected this data for 11 types of OEMs: 

•	 Air-conditioning and warm air heating equipment and commercial and industrial 

refrigeration equipment manufacturing 

•	 All other industrial machinery manufacturing 

•	 Farm machinery and equipment manufacturing 

•	 Food product machinery manufacturing 

•	 Heating equipment (except warm air furnaces) manufacturing 

•	 Industrial and commercial fan and blower manufacturing 

•	 Machine tool (metal cutting types) manufacturing 

•	 Machine tool (metal forming types) manufacturing 

•	 Other metalworking machinery manufacturing 

•	 Sawmill and woodworking machinery manufacturing 

•	 Textile machinery manufacturing 

The markups range between 1.20 (Industrial machinery, Machine tools) and 1.56 

(Heating equipment), with an average of 1.37. 

DOE estimated incremental markups using a least squares regression of the value of 

shipments on payroll and cost of materials. Because there is a large range in the size of the OEM 

types, companies with value of sales greater than $10 billion were separated from those with 

value of sales less than $10 billion. The incremental markup for larger companies was 1.27 and 

the incremental markup for smaller companies was 1.33. DOE used the former value for the 

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channel in which OEMs purchase motors directly from motor manufacturers, and the latter value 

for the channel in which OEMs purchase motors from a motor distributor. This approach 

assumes that larger companies would be more likely to purchase motors directly from motor 

manufacturers. 

7.4 CONTRACTOR OR INSTALLER MARKUP 

DOE used information from RSMeans Electrical Cost Dataiii to estimate markups used by 

contractors in the installation of equipment with small motors or replacement motors. RSMeans 

electrical cost data estimates material expense markups for electrical contractors as 10%, leading 

to a markup factor of 1.10. DOE recognizes that contractors are not used in all installations, 

since some firms have in-house technicians who would install equipment or replace a motor. 

However, DOE has no information on the extent to which this occurs, so it applied a markup of 

1.10 in all cases. 

7.5 SALES TAXES 

The sales tax represents state and local sales taxes that are applied to the end user 

equipment price of the equipment. The sales tax is a multiplicative factor that increases the end 

user equipment price. 

DOE derived state and local taxes from data provided by the Sales Tax Clearinghouse.iv 

These data represent weighted averages that include county and city rates. DOE then derived 

population-weighted average tax values for each Census division and large state, as shown in 

Table 7.5.1 below. DOE then derived U.S. average tax values using a populated-weighted 

average of the Census division and large State values. This provides a national average tax rate 

of 6.84 percent, which DOE used for each of the distribution channels. 

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Table 7.5.1 Average Sales Tax Rates by Census Division and Large State 

Census Division/State Tax Rate Population (July 1, 2007)v 

New England 4.98% 14,264,185 

Mid Atlantic 6.07% 21,118,712 

East North Central 6.56% 46,338,216 

West North Central 6.65% 20,050,579 

South Atlantic 5.95% 39,609,017 

East South Central 7.85% 17,944,829 

West South Central 8.30% 10,745,317 

Mountain 6.46% 21,360,990 

Pacific 4.97% 12,182,745 

New York State 8.25% 19,297,729 

California 7.95% 36,553,215 

Texas 7.95% 23,904,380 

Florida 6.70% 18,251,243 

7.6 OVERALL MARKUP 

The overall markup for each distribution channel is the product of the relevant markups, 

as well as the sales tax. DOE used the overall baseline markup to estimate the end user 

equipment price of baseline models, given the manufacturer selling price of the baseline models. 

As stated above, DOE considers baseline models to be equipment sold under existing market 

conditions (i.e., without new energy efficiency standards). 

DOE used the overall incremental markup to estimate changes in the end user equipment 

price, given changes in the manufacturer cost above the baseline model cost resulting from a 

standard to raise equipment efficiency. The total end user equipment price for higher-efficiency 

models is composed of two components: the end user equipment price of the baseline model and 

the change in end user equipment price associated with the increase in manufacturer cost to meet 

the new efficiency standard. The following equation shows how DOE used the overall 

incremental markup to determine the end user equipment price for higher-efficiency models (i.e., 

models meeting new efficiency standards). 

EQP = MSP × MU + ∆COST × (MU ×Tax ) STD MFG OVERALL _ BASE MFG INCR SALES 

= EQP BASE + ∆COST MFG OVERALL × MU _ INCR 

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Where: 

EQPSTD = end user equipment price for models meeting new efficiency 

standards, 

EQPBASE = end user equipment price for baseline models, 

MSPMFG = manufacturer selling price for baseline models, 

∆MSPMFG = change in manufacturer selling price for higher-efficiency models, 

MUINCR = incremental OEM or distributor markup, 

TaxSALES = sales tax, 

MUOVERALL_BASE = baseline overall markup (product of manufacturer markup, baseline 

OEM or distributor markup, and sales tax), and 

MUOVERALL_INCR = incremental overall markup (product of manufacturer markup, 

incremental OEM or distributor markup, and sales tax). 

Table 7.6.1 summarizes the markups and the overall baseline and incremental markups 

for each of the three identified channels. Weighting the values by the respective shares of each 

channel yields an average overall baseline markup of 2.42 and an overall incremental markup of 

1.75. 

Table 7.6.1 Summary of Markups for Small Motors 

Direct to OEMs 

(65%) 

Via Distributors to 

OEMs (30%) 

Via Distributors to EndUsers (5%) 

Baseline Incremental Baseline Incremental Baseline Incremental 

Motor Wholesale 

Distributor 

- - 1.28 1.10 1.28 1.10 

Equipment Manufacturer 

(OEM) 

1.37 1.27 1.37 1.33 - -

Equipment or Motor 

Distributor or Retailer 

1.43 1.18 1.43 1.18 1.44 1.18 

Contractor or Installer 1.10 1.10 1.10 1.10 1.10 1.10 

Sales Tax 1.0684 1.0684 1.0684 

Overall 2.30 1.76 2.95 2.03 2.17 1.53 

The example provided below illustrates how DOE used the baseline and incremental 

markups to derive an end user equipment price. Assuming the baseline manufacturer selling 

price is $93.46 and the change in manufacturer price to meet a given energy efficiency standard 

is $10, the resulting baseline end user equipment price (EQPBASE) and higher-efficiency 

equipment price (EQPSTD) are: 

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EQP BASE = MSP MFG OVERALL × MU _ BASE 

= $93.46 × 2.35 = $219.63 

EQP = EQP + (∆MSP × (MU )) STD BASE MFG OVERALL _ INCR 

= $219.63 + ($10 ×1.75) = $219.63 + $17.50 = $237.13 

7.7 SHIPPING COSTS 

DOE examined freight shipping costs to evaluate the impact of increased motor weight 

on installed cost. The Department collected quoted shipping costs from 8 freight shipment 

companies for single shipments by "less than truckload" (LTL) ground service weighing between 

50 and 1,200 pounds and over shipping distances between 350 and 3,000 miles. Marginal 

shipment costs per pound varied from 10.5 cents to $1.52, depending on the total weight, 

distance shipped, and guaranteed delivery times. In addition, marginal costs can be zero for small 

shipments whose cost is determined by size rather than weight. DOE used a median marginal 

shipment cost of 50 cents per pound. 

According to the engineering analysis, DOE estimates that the weight of a 1 hp small 

electric motor can vary from 31 to 55 pounds while the manufacturer selling price varies from 

$98 to $235. Shipping costs therefore are potentially significant tend to be less than 10% of the 

manufacturer selling price increase of more efficient motors. 

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REFERENCES 

i	 Pindyck, R.S. and D.L. Rubinfeld, Microeconomics, 5th ed., 2000. New Jersey: Prentice Hall. 

ii	 U.S. Census Bureau. 1997 Economic Census, Business Expenses Survey, Retail Trade, 

Household Appliance Stores, 1997. Washington, DC. 

<http://www.census.gov/csd/bes/bes97.htm> 

iii	 RSMeans Construction Publishers & Consultants, Electrical Cost Data, 31st Annual Edition. 

2008. ed. J.H. Chiang, Kingston, MA. 

iv	 Sales Tax Clearinghouse, Inc. State sales tax rates along with combined average city and 

county rates, 2006. <http://thestc.com/STrates.stm> 

v U.S. Census Bureau. Table 1: Annual Estimates of the Population for the United States, 

Regions, States, and Puerto Rico: April 1, 2000 to July 1, 2007 (NST-EST2007-01), 

December 27, 2007, <http://www.census.gov/popest/states/NST-ann-est.html> 

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