CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION 

TABLE OF CONTENTS 

6.1 INTRODUCTION .............................................................................................................. 6-1

6.1.1 Baseline Markups.................................................................................................6-3

6.1.2 Incremental Markups ........................................................................................... 6-3

6.1.3 Overall Markups .................................................................................................. 6-4

6.2 BASIC ASSUMPTIONS USED TO ESTIMATE WHOLESALER/DISTRIBUTOR 

MARKUPS ......................................................................................................................... 6-5

6.3 ESTIMATION OF DISTRIBUTOR-WHOLESALER MARKUPS.................................. 6-6

6.4 SALES TAX ....................................................................................................................... 6-7

6.5 OVERALL MARKUPS...................................................................................................... 6-8

6.6 RESULTS ........................................................................................................................... 6-9

REFERENCES .......................................................................................................................... 6-10

LIST OF TABLES 

Table 6.3.1 Wholesaler/Distributor Expenses and Markups................................................... 6-6

Table 6.4.1 State Sales Tax Rates........................................................................................... 6-8

Table 6.5.1 Baseline Average Markups by Distribution Channel and Overall Average 

Markup, Including the Sales Tax Multiplier........................................................ 6-8

Table 6.5.2 Incremental Average Markups by Distribution Channel and Overall 

Average Markup, Including the Sales Tax Multiplier......................................... 6-8

LIST OF FIGURES 

Figure 6.1.1 Distribution Channels and Shares for Refrigerated Beverage Vending 

Machines.............................................................................................................. 6-2

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CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION 

6.1 INTRODUCTION

To carry out the life-cycle 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 (BVMs). This cost is determined for both baseline 

equipment and more efficient equipment that the customer would purchase following the 

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

equipment is not known because 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 BVMs 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. As 

shown in Figure 6.1.1, DOE defined three distribution channels 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 on site 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 on site. 

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 industry 

comments from the public meeting on the advance notice of proposed rulemaking.1

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BVM Manufacturer 

Bottler/Distributor Vending Machine 

Operator 

Site 

Owner 

Wholesaler/Distributor 

85% 10% 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: 

EQPCUST = MSPBASE x (1+ ST) Eq. 6.1

Where: 

 EQPCUST = equipment price to the customer ($), 

 MSPBASE = 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: 

 EQPCUST = MSPBASE x MUDIST x (1+ST) Eq. 6.2

Where: 

 MUDIST = 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. 

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6.1.1 Baseline Markups 

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

MSP for each step in the distribution channel. 

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

price: 

EQPMFGR BASE = MSPBASE x (1+ST) Eq. 6.3

Where: 

EQPMFGR BASE = bottler/distributor price to the customer of baseline equipment ($). 

If sold to a customer by a wholesaler/distributor: 

EQPDIST BASE= MSPBASE x MUDIST BASE x (1+ST) Eq. 6.4

Where: 

 EQPDIST BASE = distributor price to the customer of baseline equipment ($), 

 MUDIST BASE = distributor markup on baseline equipment, and 

 ST = sales tax rate. 

The use of the markups results in the wholesaler/distributor (EQPDIST BASE) prices of 

baseline BVM equipment. 

6.1.2 Incremental Markups 

For the purpose 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: 

EQPMFGR INCR = MSP INCR x (1+ST) Eq. 6.5

Where: 

EQPMFGR INCR = incremental equipment price to the customer ($), 

 MSPINCR = change in the MSP of higher efficiency equipment brought about by an 

increase in efficiency due to new standards ($), and 

 ST = sales tax rate. 

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

EQPDIST INCR = MFGINCR x MUDIST INCR x (1+ ST) Eq. 6.6

Where: 

 EQPDIST INCR = incremental wholesaler/distributor price to the customer ($), and 

 MUDIST INCR = incremental wholesaler/distributor markup 

 ST = sales tax rate. 

In equation 6.6, the MUDIST 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 (EQPDIST) 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: 

 EQPCUST BASE = MSPBASE x (WTMFGR BASE + WTDIST BASE x MUDIST BASE ) x (1+ST) 

= MSPBASE x (1+MUOVERALL BASE ) Eq. 6.7

 EQPCUST INCR = MSPINCR x (WTMFGR INCR + WTDIST INCR x MUDIST INCR) x (1+ST) 

= MFGINCR x MUOVERALL INCR Eq. 6.8 

 EQPCUST= EQPCUST BASE+ EQPCUST INCR Eq. 6.9 

Where: 

MUOVERALL BASE = overall weighted baseline markup that is the product of all the weights and 

baseline markups for each step of the distribution channel, 

MUOVERALL INCR = overall weighted incremental markup that is the product of all the weights 

and incremental markups for each step of the distribution channel, 

 EQPCUST BASE = baseline customer price ($), 

 EQPCUST INCR = incremental customer price ($), 

 EQPCUST = total customer price ($), 

 WTMFGR BASE = weight (percent) of baseline equipment sales direct to customers, 

 WTDIST BASE = weight (percent) of baseline equipment sales through wholesalers, 

 WTMFGR INCR = weight (percent) of higher efficiency equipment sales direct to customers, 

and 

 WTDIST INCR = weight (percent) of higher efficiency equipment sales through wholesalers, 

and 

 ST = sales tax rate. 

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

customer price (EQPCUST BASE) and the incremental customer price (EQPCUST INCR). For a 

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

equipment to the customer (EQPCUST ) is the sum of the baseline customer price (EQPCUST BASE) 

and the incremental customer price (EQPCUST INCR). 

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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 

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 non-refrigerated vending machines and other equipment), the data provide the most 

accurate available indication of BVM equipment costs. 

DOE searched for 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 on prior analysis of the heating, ventilation, and 

air conditioning 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/ 

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distributors of BVM equipment.4

 Following standard economic theory, competitive firms facing 

elastic demand either set prices in line with costs or quickly go out of business.5

6.3 ESTIMATION OF DISTRIBUTOR-WHOLESALER MARKUPS 

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

for Other Commercial Equipment Merchant Wholesalers (North American Industry 

Classification System [NAICS] 423440). This sector includes establishments primarily engaged 

in distributing and wholesaling refrigerated BVMs 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 once converted to a percentage basis, 

the total dollar values that the U.S. Census Bureau reported 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 

Wholesale Firm Expenses or Revenue 

Description 

Per Dollar 

Sales Revenue

Per Dollar Cost 

of Goods Sold

Direct Cost of Equipment Sales: Cost of goods sold $0.69 $1.00 

Labor Expenses: Salaries and benefits $0.13 $0.19 

Occupancy Expense: Rent, maintenance, and utilities $0.07* 

Other Operating Expenses: Depreciation, advertising, and insurance 

$0.10 

$0.07* 

Profit $0.09 $0.13 

Baseline Markup (MUWHOLE BASE): Revenue per dollar cost of goods sold 1.46 

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

Source: U.S. Census Bureau. December 2005. Wholesale Trade, Miscellaneous Subjects: 2002. EC02-42SX-SB 

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

U.S. Census Bureau. December 2005. Wholesale Trade, Miscellaneous Subjects: 2002. EC02-42SX-SB 

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. EC02-42SX-SB 

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 and results in a 

wholesaler/distributor baseline markup (MUDIST BASE) of 1.46 ($1.46 ÷ $1.00).

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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, 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 (MUDIST INCR) of 1.20 ($1.20 ÷ $1.00).

DOE recognizes that there is a possibility of case-to-case 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 from the mean 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 approximately 0.06. 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 Excelspreadsheet 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. 

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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 8.15 Kentucky 6.00 North Dakota 5.75 

Alaska 1.45 Louisiana 8.70 Ohio 6.80 

Arizona 7.15 Maine 5.00 Oklahoma 8.10 

Arkansas 8.20 Maryland 6.00 Oregon 0.00 

California 8.00 Massachusetts 5.00 Pennsylvania 6.25 

Colorado 6.35 Michigan 6.00 Rhode Island 7.00 

Connecticut 6.00 Minnesota 6.85 South Carolina 6.90 

Delaware 0.00 Mississippi 7.00 South Dakota 5.50 

Dist. of Columbia 5.75 Missouri 7.05 Tennessee 9.40 

Florida 6.75 Montana 0.00 Texas 8.00 

Georgia 6.95 Nebraska 6.00 Utah 6.70 

Hawaii 4.40 Nevada 7.50 Vermont 6.05 

Idaho 6.05 New Hampshire 0.00 Virginia 5.00 

Illinois 8.40 New Jersey 6.95 Washington 8.50 

Indiana 7.00 New Mexico 6.40 West Virginia 6.00 

Iowa 6.75 New York 8.25 Wisconsin 5.40 

Kansas 6.90 North Carolina 6.80 Wyoming 5.35 

The distribution of sales tax rates ranges from a minimum of 0 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 1.069 

Sales Tax Multiplier 1.070 1.070 1.070 

Overall Markup 1.070 1.562 1.144 

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 1.030 

Sales Tax Multiplier 1.070 1.070 1.070 

Overall Markup 1.070 1.284 1.102 

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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 $1,144. 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 (1.102) to estimate a customer price increase of $102.

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 BVMs. 

Supporting data for the calculation of baseline and incremental markups are provided in 

appendix C. 

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6-10 

REFERENCES 

1. Comments by Royal Vendors, No. 29 at p. 39 and Dixie-Narco, No. 29 at p. 40. 

2. Dale L., D. Millstein, K. Coughlin, R. Van Buskirk, G. Rosenquist, A. Lekov, and 

S. Bhuyan. An Analysis of Price Determination and Markups in the Air-Conditioning and 

Heating Equipment Industry. 2004. Lawrence Berkeley National Laboratory: Berkeley, CA. 

Report No. LBNL-52791. 

3. M. Metoyer as reported in M. Skaer. What Should You Charge? Try These Tested Formulas. 

Air Conditioning, Heating and Refrigerator News. March 26, 2001. 

4. U.S. Census Bureau. 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 <http://factfinder.census.gov/servlet/IBQTable?_bm=y&-

MFG=10971:42&-ds_name=EC0242I3&-_lang=en>. 2002. (Accessed on April 16, 2007.) 

5. Pindyck R. and D. Rubinfield. Microeconomics. 2000. Prentice-Hall. 

6. The Sales Tax Clearinghouse. <https://thestc.com/STRates.stm> (Accessed on January 20, 

2009.) 

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