6

- i CHAPTER 6. MARKUPS ANALYSIS

TABLE OF CONTENTS

6.1 INTRODUCTION

................................ ................................ ................................ ........... 6

- 1

6.2 DISTRIBUTION CHANNEL S

................................ ................................ ....................... 6

- 2

6.3 MA NUFACTURER MARKUP

................................ ................................ ...................... 6

- 3

6.4 WHOLESALER AND CONTR ACTOR MARKUPS

................................ .................... 6

- 4

6.4.1 Approach for Wholesaler Markup

................................ ................................ ................... 6

- 5

6.4.2 Derivation of Wholesaler Markups

................................ ................................ .................. 6

- 6

6.4.3 Approach for Mechanical and General Contractor Markup

................................ ............ 6

- 7

6.4.4 Derivation of National Mechanical Contractor Markups

................................ ................ 6

- 8

6.4.4.1 Markups for Mechanical Contracto rs in the Replacement and New

Construction Markets

................................ ................................ ..................... 6

- 9

6.4.5 Derivation of General Contractor Markups

................................ ................................ ... 6

- 11

6.5 DERIVATION OF REGION AL MARKUPS

................................ ............................... 6

- 12

6.5.1.1 Estimation of Regional Wholesaler Markups

................................ .............. 6

- 12

6.5.1.2 Estimation of Regional Mechanical Contractor Markups

........................... 6

- 13

6.5.1.3 Estimation of Regional General Contractor Markups

................................ . 6

- 16

6.6 MARKUP FOR MANUFACTU RED HOME GAS FURNACE S

................................ 6

- 17

6.7 SALES TAX

................................ ................................ ................................ .................. 6

- 20

6.8 OVERALL MARKUPS

................................ ................................ ................................ . 6

- 22

LIST OF TABLES

Table 6.4.1 Wholesaler Expenses and Markups

................................ ................................ ..... 6

- 6

Table 6.4.2 Mechanical Contractor Expenses and Markups Based on Census Bureau

Data

................................ ................................ ................................ ...................... 6

- 9

Table 6.4.3 Baseline Markup, All Mechanical Contractors

................................ .................. 6

- 10

Table 6.4.4 Baseli ne Markups for the Replacement and New Construction Markets,

All Mechanical Contractors

................................ ................................ ............... 6

- 10

Table 6.4.5 Baseline and Incremental Markups for the Replacement and New

Construction Markets

................................ ................................ ......................... 6

- 11

Table 6.4.6 General Contractor Expenses and Markups

................................ ....................... 6

- 11

Table 6.5.1 Regional Wholesaler Markups for Furnaces

................................ ...................... 6

- 13

Table 6.5.2 Population

- Weighted Regional Mechanical Contractor Markups for

Furnaces

................................ ................................ ................................ ............. 6

- 15

Table 6.5.3 Regional General Contractor Markups for Furnaces

................................ ......... 6

- 17

Table 6.6.1 Manufactured Home Manufacturer Expenses and Markups fo r New

Construction

................................ ................................ ................................ ....... 6

- 18

Table 6.6.2 Manufactured Home Contractor Expenses and Markups for New

Construction

................................ ................................ ................................ ....... 6

- 19

Table 6.7.1 Average Sales Tax Rates by RECS Region

................................ ....................... 6

- 21

Table 6.8.1 Summary of National Average Markups on Non

- Manufactured Home

Furnace Fans

................................ ................................ ................................ ...... 6

- 236

- ii Table 6.8.2 Summary of National Average Markups on Manufactured Home Furnace

Fans

................................ ................................ ................................ .................... 6

- 24

Table 6.8.3 Summary of Total Markup by Furnace Fan Product Class

................................ 6

- 24

LIST OF FIGURES

Figure 6.2.1 Distribution Channels for Residential Furnaces

................................ .................. 6

- 2 Figure 6.2.2 Distribution Channels for Manufactured Home Gas Furnaces

............................ 6

- 36

- 1 CHAPTER 6. MARKUP ANALYSIS

6.1 INTRODUCTION

To carry out its analyses, the U.S. Department of Energy (DOE) needed to determine the cost to the consumer of baseline products and the cost of more efficient units the consumer would purchase under new energy conservation standards. DOE determined such c osts based on engineering estimates of manufacturing costs plus appropriate markups based on the distribution

channels for furnace fans.

For wholesalers and contractors , DOE estimated a baseline markup and an incremental markup. DOE define s a baseline mar kup as a multiplier that convert s the manufacturing selling price of equipment with baseline efficiency to the consumer purchase price for the equipment at the same baseline efficiency level. An incremental markup is defined as the multiplier to convert

th e incremental increase in manufacturing selling price of higher efficiency equipment to the

consumer purchase price for the same equipment. Because companies mark up the price to cover business cost and profit margin at each step in the distribution channe l, b oth baseline and incremental markups are dependent on the particular distribution channe l, as described in Section

6.2

.

The components used to produce a furn ace fan are usually purchased by furnace

manufacturers who assemble the furnace fan , which is t hen install ed in a furnace

. F rom this point, the furnace fans are passed along the distribution channels as part of furnaces. Essentially, various markups applie d to these products by different market participants are also the markups applied to furnace fans

, whose manufacturing costs account for a portion of the total manufacturing costs of the finished products

. Therefore , DOE developed the markup analysis for

f urnace fans based on furnaces. According to industry sources, the market for furnace fans replacing a failed furnace fan is very small, and DOE did not include this market in its analysis.

At each point in the distribution channel, companies mark up the price of a product 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 ). The gross margin takes account of the exp enses of companies in the distribution channel, including overhead costs (sales, general, and administration); research and development (R&D) and interest expenses; depreciation; and taxes

— and company 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. Products command lower or higher markups, depending on company expenses associated with the product and the degree of market competition.6

- 2 6.2 DISTRIBUTIO N CHANNELS

Two types of distribution channels describe how most furnaces (and the furnace fans in them) pass from the manufacturer to the consumer. The first distribution channel applies to furnaces installed in replacement markets. In th e replacement dis tribution channel, the

manufacturer generally sells the equipment to a wholesaler, who in turn sells it to a mechanical contractor, who in turn sells it to the consumer. 1 The second distribution channel applies to

furnaces that are installed in new constru ction and

, thus

, includes an additional link in the

chain

— the general contractor. In th e new construction distribution channel, the manufacturer sells the equipment to a wholesaler, who in turn sells it to a mechanical contractor, who in turn

sells it to a general contractor.

Figure 6.2 .1 illustrates the two main distribution channels for most residential furnaces

. A new product class, hydron ic air handler , was added to the furnace product classes that DOE is considering in th is analysis. DOE as sessed the distribution channel of this product and found that it is carried by the same wholesalers and contractors that carry the conventional types of

furnaces. (1) (2) (3 ) Hence, the distribution channels described previously also apply to hydron ic air

handlers

.

Replacement:

New Construction:

Figure 6.2.1 Distribution Channels for Residential Furnaces

Manufactured home gas furnaces are sold as part of manufactured homes, so these furnaces have a specific distribution chain (Figure 6.2.2) when purchased for the new

construction market. The furnace manufacturer sells to the maker of the manufactured home, who installs the equipment in the home. The manufactured home manufacturer sells the home to a contractor, who in turns sells it to a homebuyer and provides installation services. The

1 One manufacturer uses a one

- step distribution chain (manufacturer to contractor) and is the only known exception. Several large retailers are trying to step between wholesalers and contractors, but most experts do not expect the trend to change the dis tribution chain significantly in the near term. Manufacturer Wholesaler Mechanical

Contractor Consumer

Wholesaler Mechanical

Contractor General

Contractor Consumer Manufacturer6

- 3 equipment manufacturer markup for manufactured home gas furnaces is identical to the manufacturer markup for other furnaces. For manuf actured home furnaces purchased for the replacement market, the distribution channel should be the same as the replacement distribution

channel for non

- weatherized gas furnaces.

Replacement:

New Construction:

Figure 6.2.2 Distribution Channel s for Manufactured Home Gas

Furnaces

6.3 MANUFACTURER MARKUP

DOE uses manufacturer markups to transform a manufacturer’s product cost into a manufacturer sales price. Using the CGS and gross margin (GM) , the manufacturer markup can

be calculated as follows:

MFG MFG MFG

MFG CGS GM CGS MU **+**

**=**

Where:

MU MFG = m anufacturer markup,

CGS MFG = m anufacturer cost of goods sold, and

GM MFG = m anufacturer gross margin.

The manufacturer’s CGS (or manufacturer production cost ( MPC ) ) plus its GM equals the manufacturer selling price ( MSP ). Manufacturer Manufactured

Home

Manufacturer Manufactured

Home

Contractor Consumer Manufacturer Wholesaler Mechanical

Contractor Consumer6

- 4 6.4 WHOLESALER AND CONTR ACTOR MARKUPS

DOE examined the manner in which wholesaler and contractor markups may change in response to changes in furnace efficiency levels and other factors. Using the available data, DOE

estimated that there are differences between incremental markups on i ncremental equipment

costs of higher efficiency products and the baseline markup on direct business costs of products with baseline efficiency

.

DOE derived the wholesaler and contractor markups from three key assumptions about

the costs associated with fu rnaces. DOE based the wholesaler and mechanical contractor markups on firm

- level income statement data, while it based the general contractor markups on U.S. Census Bureau data for the residential building construction industry. DOE obtained the

firm incom e statements from the Heating, Air

- conditioning & Refrigeration Distributors International (HARDI) 201 1 Profit Report and from the Air Conditioning Contractors of America (ACCA) 2005 Financial Analysis

. (4) (5) HARDI and ACCA are trade associations representing wholesalers and mechanical contractors, respectively. DOE used the financial data

from the 2007 U

. S

. Census of Business for developing general contractor markups in the same

form as the income sta tement data for wholesalers and mechanical contractors. These income statements break down the components of all costs incurred by firms that supply and install heating and air

- conditioning equipment. 2 The key assumptions used to estimate markups using

the se financial data are:

1. The firm income statements faithfully represent the various average costs incurred by firms distributing and installing residential furnaces

.

2. These costs can be divided into two categories: 1) costs that vary in proportion to the

MSP of residential furnaces (variant costs ); and 2) costs that do not vary with the MSP of

residential furnaces (invariant costs).

3. Overall

, wholesale and contractor pr ices for residential furnaces vary in proportion to the

wholesale and contractor costs for residential furnaces included in the income statements.

In support of the first assumption, the income statements itemize firm costs into a

number of expense categories, including direct costs to purchase or install the equipment, operating labor and occupancy costs, and other operating costs and profit. Although wholesalers and contractors tend to handle multiple commodity lines, including room air c onditioners, furnaces, central air conditioners and heat pumps , and boilers, the data provide the most accurate

available indication of the expenses associated with residential furnaces

.

Information obtained from the trade literature, and from selected heating, ventilating, and

air

- conditioning (HVAC) wholesalers, contractors, and consultants, tends to support the second

2 Wholesaler s and mechanical contractors to which these reports refer handle multiple commodity lines, including

residential and commercial air conditioners and warm

- air furnaces.6

- 5 assumption; this information indicates that wholesale and contractor markups vary according to the quantity of labor and materials used to distribute and install appliances

. In the following discussion, DOE assumes a division of costs between those that do not scale with the manufacturer price (labor and occupancy expenses ) and those that do (operating expenses and profit).

In support of the third assumption, the HVAC wholesaler and contractor industry is competitive, and consumer demand for heating and air conditioning is inelastic, i.e., the demand is not expected to decrease significantly with an increase in price of equipment. The large number of HVAC firms listed in the 2007 Census indicates the competitive nature of the market. For example, there are more than 700 HVAC manufacturers, (6) 5,300 wholesaler s of heat pumps

and air

- conditioning equipment, (7) more than 170 ,000 general residential contractors, 36,000 commercial and institutional building contractors, (8) and 91,000 HVAC con tractors (9) listed in

the 200 7 Census

. Following standard economic theory, competitive firms facing inelastic demand either set prices in line with costs or quickly go out of business. (10)

DOE co ncluded that markups for more efficient equipment are un likely to be proportional to all direct costs. When the wholesaler’s purchase price of equipment increases, for example, only a fraction of a business’ expenses increases, while the remainder may stay relatively constant. For example, if the unit price of a furnace unit increases by 30 percent due to improved efficiency, it is unlikely that the cost of secretarial support in an administrative office will increase by 30 percent also. Therefore, DOE assu med that i ncremental markups cover only those costs that scale with a change in the MSP (variant costs ).

6.4.1 Approach for Wholesaler Markup

Using the above assumptions, DOE developed baseline and incremental markups for wholesalers using the firm income stat ement from the HARDI 2011 Profit Report ( a ppendix 6

- A. 1 ). The baseline markups cover all of the wholesaler’s costs ( both invariant costs and variant

costs ). Here variant costs were defined as costs that likely vary in proportion to the change in

MSP induced by increased efficiency standards; in contrast, invariant costs were defined as costs that are unlikely to vary in proportion to the change in MSP due to increased efficiency standards. DOE calculated the baseline markup for wholesalers using the following equation:

WHOLE WHOLE WHOLE WHOLE

WHOLE WHOLE WHOLE

BASE CGS VC IVC CGS

CGS GM CGS MU ) ( **+ +** 

**= +** 

**=**

Where:

MU BASE = b aseline wholesaler markup,

CGS WHOLE = w holesaler cost of goods sold,

GM WHOLE = w holesaler gross margin,

IVC WHOLE = w holesaler invariant costs, and

VC WHOLE = w holesaler variant costs.6

- 6 Incremental markups are coefficients that relate the change in the MSP of more energy

efficient models , or those products that meet the requirements of new energy conservation

standards

, to the change in the wholesaler sales price. Incremental mar kups cover only those costs that scale with a change in the MSP (variant costs, VC ). It calculated the incremental markup ( MU INCR ) for wholesalers using the following equation:

WHOLE WHOLE WHOLE

INCR CGS VC CGS MU **+**

**=**

Where:

MU INCR = i ncremental wholesaler markup,

CGS WHOLE = w holesaler cost of goods sold, and

VC WHOLE = w holesaler variant costs.

6.4.2 Derivation of Wholesaler Markups

Wholesalers reported median data in a confidential survey that HARDI conducted of

member firms. 2 In the survey, HARDI itemized revenues and costs into cost categories, including direct equipment expenses (cost of goods sold ), labor expenses, occupancy expenses, other operating expenses, and profit. DOE presents these data in full in a ppendix 6

- A.1. Tabl e 6.4.1 summarizes them as cost

- per

- dollar sales revenue in the first data column.

Table 6.4

. 1 Wholesaler Expenses and Markups

Descriptions Per Dollar

Sales Revenue
$ Per Dollar Cost

of Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.735 1.000 Labor Expenses: Salaries and benefits 0.150 0.204 Occupancy Expense: Rent, maintenance, and utilities 0.036 0.049 Other Operating Expenses: Depreciation, advertising, and insurance. 0.054 0.073 Operating Profit 0.025 0.034

Wholesaler Baseline Markup ( MU WHOLE BASE ) 1.3 60 Incremental Markup ( MU WHO LE INCR ) 1.107

Source: Heating, Air Conditioning & Refrigeration Distributors International . 2011

. 2011 Prof it Report ( 2010 D ata).

In this case, direct equipment expenses (cost of goods sold) represent about $0.7 4 per dollar sales revenue, so for every $1 wholesalers take in as sales revenue, $0.7 4 is used to pay the direct equipment costs. Labor expenses represent $0.1 5 per dollar sales revenue, occupancy expenses represent $0.04, other operating expenses represent $0.05, and profit accounts for $0.0 3 per dollar sales revenue.

DOE converted the exp enses per dollar sales into expenses per dollar cost of goods sold, by dividing each figure in the first data column by $0.7 4 (i.e., cost of goods sold per dollar of sales revenue). The data in column two show that, for every $1.00 the wholesaler spends on equipment costs, the wholesaler allocates $0. 204 to cover labor costs, $0.0 49 to cover occupancy expenses, $0.074 for other operating expenses, and $0.0 34 in profits. This totals to $1.36 0 in6

- 7 sales revenue earned for every $1.00 spent on equipment costs. Therefore, the wholesaler baseline markup ( MU WHOLE BASE ) is 1.36 0 ($1.36 0 ÷ $1.00).

DOE also used the data in column two to estimate the incremental markup. The incremental markup depends on which of the costs in T able 6.4.1 are variant and which are invariant with MSP. For example, for a $1.00 increase in the MSP, if all of the other costs scale with the MSP (i.e., all costs are variant), the increase in wholesale price will be $1.36 0 , implying that the incremental markup is 1.36 0 , or the same as the baseline markup. At the other extreme, if none of the other costs is variant, then a $1.00 increase in the MSP will lead to a $1.00

increase in the wholesa le price, for an incremental markup of 1.0. DOE believes that the labor and occupancy costs will be invariant and that the other operating costs and profit will scale with the MSP (i.e., be variant). In this case, for a $1.00 increase in the MSP, the whole sale price will increase to match changes in ”other” operating costs and operating profit of $0.0 79 , which when divided by 73. 5 cents in cost of goods sold yields an increase of $0. 107 , giving a wholesaler incremental markup ( MU WHOLE INCR ) of 1. 107 . See ap pendix 6

- A .1 for cost details.

6.4.3 Approach for Mechanical and General Contractor Markup

The type of financial data used to estimate markups for wholesalers is also available for mechanical contractors and general contractors from the 2007 Economic Census and ACCA 2005 Financial Analysis. To estimate mechanical contractor markups for furnaces , DOE

collected financial data from the Plumbing and HVAC Contractors (NAICS 23822) series from the 2007 Economic Census and from ACCA 2005 Financial Analysis. To estimate general contractor markups, DOE collected data from the Residential Building Construction series from the 2007 Economic Census, which is the aggregation of New Single

- Family General Contractors (NAICS 236115), New M ultifamily H ousing C onstruction (NAICS 236116), New H ousing

O

perative B uilders (NAICS 236117), and Residential R emodelers (NAICS 236118). ACCA financial data provide GM as percent of sales for the mechanical contractor industry; therefore, baseline markup can be derived with the following equation:

(%) (%) (%)

GM Sales Sales MU BASE

**− =** 

The U.S. Census data include the number of establishments, payroll for construction workers, value of constructi on, cost of materials, and cost of subcontracted work at both state and national levels. DOE calculated the baseline markup for mechanical contractors and general contractors using the following equation:

SubCost MatCost Pay V MU CONSTRUCT

BASE **+ +**  **=**

Where:6

- 8 BASE 

### MU

= baseline mechanical contractor or general contractor markup,

CONSTRUCT 

### V

= value of construction,

Pay = payroll for construction workers,

MatCost = cost of materials, and

SubCost = cost of sub contracted work.

Analogously, DOE estimated the incremental mechanical contractor and general contractor markups by only marking up those costs that scale with a change in the MSP (variant

costs

, V C

) for more energy

- efficient products. As stated above, D OE assumes a division of costs between those that do not scale with the manufacturer price (labor and occupancy expenses), and those that do (other operating expenses and profit). Hence, DOE categorized the Census cost data in each major cost category and estimated markups using the following equation:

CONT CONT CONT

INCR CGS VC CGS MU **+**

**=**

Where:

MU INCR = incremental contractor markup,

CGS CONT = contractor cost of goods sold, and

VC CONT = c ontractor variant costs.

6.4.4 Derivation of National Mechanical Contractor Markups

The 2007 Economic Census provides Geographic Area Series for the Plumbing and

HVAC Contractors (NAICS 23822) sector, which contains national average sale s and cost data

, including value of construction, cost of subcontract work, cost of materials, and payroll for construction workers. It also provides the cost breakdown of gross margin, including labor

expenses, occupancy expenses, other operating expenses, and profit. The gross margin provided by the U.S. Census is disaggregated enough that DOE wa s able to determine the invariant (labor and occupancy expenses) and variant (other operating expenses and profits) costs for this particular sector. By using the equation mentioned above, baseline and incremental markups were estimated. The markup results are presented in Table 6.4.2 . (Appendix 6

- A. 2 contains the full set of data.)6

- 9 Table 6.4

. 2 Mechanical Contractor Expenses and Markups Based on Census Bureau Data

Description Mechanical Contractor

E xpenses or Revenue

Per Dollar

Sales Revenue
$ Per Dollar

Cost of Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.6 8 1.00 Labor Expenses: Salaries (indirect) and benefits 0.1 8 0.26 Occupancy Expense: Rent, maintenance, and utilities 0.02 0.03 Other Operating Expenses: Depreciation, advertising, and insurance. 0.0 8 0. 12

Net Profit Before Taxes 0. 04 0. 06 Baseline Markup ( MU MECH BASE ): Revenue per dollar cost of goods 1. 48 Incremental Markup ( MU MECH INCR ): Increased revenue per dollar increase in cost of goods

sold 1. 18

Source: U.S. Census Bureau

. 200 7. Plumbing, Heating, and Air

- Conditioning Contractors. Sector 23: 238220. Construction: Industry Series

, Preliminary Detailed Statistics for Establishments

, 2007.

The first data column in Table 6.4

. 2 provides the cost of goods sold a nd a list of gross margin components as expenses per dollar of sales revenue. As shown in the table, the direct cost of sales represents about $0.68 per dollar sales revenue to the mechanical contractor and the gross margin totals $0.32 per dollar sales re venue. 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 $0.68. For every $1.00 the mechanical contractor spends on equipment costs, the mechanical

contractor earns $1.00 in sales revenue to cover the equipment cost and $0.48 to cover the other costs. This totals $1.48 in sales revenue earned for every $1.00 spent on equipment costs. This is equivalent to a baseline markup ( MU MECH CONT BASE ) of 1.48 for mechanical con tractors.

DOE was also able to use the data in column two in Table 6.4

. 2 to estimate the incremental markups, after classifying the costs as either invariant or varia nt. At one extreme, if all of the other costs scale with the equipment price (i.e., all costs are variant), the increase in general contractor price will be $1.48, implying that the incremental markup is 1. 48 or the same as the baseline markup. At the othe r extreme, if none of the other costs are variant, then a $1.00 increase in the equipment price will lead to a $1.00 increase in the general contractor price, for an incremental markup of 1.0. DOE believe s the labor and occupancy costs are invariant and th e other operating costs and profit scale with the equipment price (i.e., are variant). In this case, for a $1.00 increase in the equipment price, the general contractor price will increase by $1. 18

, giving a general contractor incremental markup ( MU MECH CO NT INCR ) of 1. 18

.

6.4.4.1 Markups for Mechanical Contractors in the Replacement and New

Construction Markets

DOE derived the baseline and incremental markups for both replacement and new construction markets using the 2007 Economic Census industrial cost data (11) supplemented with

the most recent ACCA 2005 financial data (4) . The 2007 Economic Census provides sufficient

detailed cost breakdown for the Plumbing and HVAC Contractors (NAICS 23822) sector so that DOE was able to estimate baseline and incremental markups for mechanical contractors. However, the 2007 Economic Census does not separate the mechanical contractor market into replacement and new construction markets. In order to calculate markups for these two markets,6

- 10 DOE utilized 2005 ACCA financial data, which reports gross margin data for the entire mechanical contractor market and for both the replacement and new construction markets.

The HVAC contractors, defined here as mechanical contractors, reported median cost data in an ACCA 2005 financial analysis of the HVAC industry. These data are shown in

Table 6.4

. 3

.

Table 6.4

. 3 Baseline Markup , All Mechanical Contractors

Description Contractor Expenses or Revenue

Per Dollar

Sales Revenue
$ Per Dollar

Cost of Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.73 1.00 Gross Margin: Labor, occupancy, operating expenses, and profit 0.27 0.37

Revenue: Baseline revenue earned per dollar cost of goods 1.37 Baseline Markup ( MU MECH CONT BASE ) 1.37 Source: Air Conditioning Contractors of America. 2005. Financial Analysis for the HVACR Contracting Industry.

Table 6.4

. 4 summarizes the gross margin and resulting baseline markup data for all mechanical contractors that serve the replacement and new construction markets

.

T able 6.4

. 4 Baseline Markup s for the Replacement and New Construction Markets, All

Mechanical Contractors

Description Contractor Expenses or Revenue by Market Type Replacement New Construction

Per Dollar

Sales Revenue
$ Per Dollar

Cost of Goods
$ Per Dollar

Sales Revenue
$ Per Dollar

Cost of Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.70 1.00 0.75 1.00

Gross Margin: Labor, occupancy, operating expenses, and profit 0.30 0.43 0.25 0.33

Baseline Markup ( MU MECH CONT BASE ): Revenue per dollar cost of goods NA 1.43 NA 1.33

Source: Air Conditioning Contractors of America. 2005. Financial Analysis for the HVACR Contracting Industry.

Using the baseline markup data from Table 6.4.4 and results from Table 6.4.3 , DOE

ca lculated that the baseline markups for the replacement and new construction markets are 4 .4 percent higher and 2.9 percent lower, respectively, than for all mechanical contractors serving all

markets

.

The markup deviations (i.e., 4.4 percent higher and 2.9 percent lower for the replacement and new construction markets, respectively) derived for all mechanical contractors were then applied to the baseline markup of 1.47 and the incremental markup of 1.18 estimated for the Plumbing and HVAC Contractors (NAICS 23822) sector in Table 6.4

. 2 . DOE assumed that this deviation applies equally to the baseline and incremental markups calculated from the 2007 Economic Census. The results of the baseline and incremental markups for the replacement and new construction markets served by mechanical contractors are shown in Table 6.4

. 5

.6

- 11 Table 6.4

. 5 Baseline and Incremental Markups for the Replacement and New

Construction Markets Baseline Markup Incremental Markup Replacement Market 1.55 1.23

New Construction Market 1.44 1.15

6.4.5 Derivation of General Contractor Markups

DOE derived markups for general contractors from U.S. Census Bureau data for the residential building construction sector. (12) The residential construction sector includes establishments primarily engaged in construction work, including new construction work, additions, alterations, and repairs. The U.S. Census Bureau data for the construction sector

include detailed statistics f or establishments with payrolls, similar to the data reported by HARDI for wholesalers. The primary difference is that the U.S. Census Bureau reports itemized revenues and expenses for the construction industry as a whole in total dollars rather than in

ty

pical 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, represent revenues and expenses for an average or typical contract ing business. Similar to the data for wholesalers, Table 6.4

. 6 summarizes the expenses for general contractors as expenses per dollar sales revenue in the first data column

. (Appendix 6

- A. 3 contains the full set of data

. )

Table 6.4

. 6 General Contractor Expenses and Markups

Description General Contractor Expenses or Revenue

Per Dollar

Sales Revenue
$ Per Dollar

Cost of Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.68 1.00 Labor Expenses: Salaries (indirect) and benefits 0.08 0.12 Occupancy Expense: Rent, maintenance, and utilities 0.01 0.01 Other Operating Expenses: Depreciation, advertising, and insurance. 0.06 0.09

Net Profit Before Taxes 0.17 0.25 Baseline Markup ( MU GEN CONT BASE ): Revenue per dollar cost of goods 1. 48 Incremental Markup ( MU GEN CONT INCR ): Increased revenue per dollar increase in cost of goods

sold 1. 34

Source: U.S. Census Bureau

. 200 7. Residential Building Construction. Sector 23: 236115

- 236118. Construction: Industry Series: Preliminary Detailed Statistics for Establishments: 2007

.

As shown in the first column , the direct cost of sales represents about $0.68 per dollar sales revenue to the general contractor. Labor expenses represent $0.08 per dollar sales revenue, occupancy expenses represent $0.01 per dollar sales revenue, other operating expenses represent $0.03, and profit makes up $0.20 per dollar s ales revenue.

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 $0.68. The data in column two show that, for every $1.00 the general contractor spends on equipment costs, the general contractor earns $1.00 in sales revenue to cover the equipment cost, $0.12 to cover labor costs, $0.01 to cover6

- 12 occupancy expenses, $0.09 for other operating expenses, and $0.25 in profits. This totals to
$1.48 in sales revenue earned fo r every $1.00 spent on equipment costs. Thus, the general contractor baseline markup ( MU GEN CONT BASE ) is 1.48.

DOE was also able to use the data in column two in Table 6.4

. 6 to estimate the incremental markups, after classifying the costs as either invariant or variant. At one extreme, if all of the other costs scale with the equipment price (i.e., all costs are variant), the increase in general contractor price will be $1.48, implying that the incremental markup is 1. 48, or the same as the baseline markup. At the other extreme, if none of the other costs are variant, then a $1.00 increase in the equipment price w ill lead to a $1.00 increase in the general contractor price, for an incremental markup of 1.0. DOE believe s the labor and occupancy costs are invariant and the other operating costs and profit scale with the equipment price (i.e., are variant). In this ca se, for a $1.00 increase in the equipment price, the general contractor price will increase by $1.3 4

, giving a general contractor incremental markup ( MU GEN CONT INCR ) of 1.3 4

.

6.5 DERIVATION OF REGION AL MARKUPS

In this analysis, DOE considered seven different furnace product classes. DOE assumed a

market saturation rate for each product class that varies by geographical region, based on the shipment forecasts for the year 2018. Therefore , regional markups were calculated for each furnace fan product class.

Wholesalers and mechanical and general contractors in the furnace indust r y were divided into the 29 regions provided by the latest Residential Energy Consumption Survey (RECS) (13)

. R egional baseline and incremental markups we re derived using the region/state level data from the 2011 HARDI Profit Report and the 2007 Economic Census.

6.5.1.1 Estimation of Regional Wholesaler Markups

Based on the regional income statement from the 2011 HARDI Profit Report, DOE

estimated baseline and in cremental markups for the seven HARDI regions (Northeastern, Mid

Atlantic, Southwestern, Great Lakes, Central, Southwestern, and Western) using the methodology shown in Table 6.4.1 . Next, each state in each region was assigned the HARDI regional baseline and incremental markups for the region to which it belongs. Third, DOE assigned all states to one of the 29 RECS regions and then calculated populati on

- weighted

baseline and incremental markup averages for each RECS region

. The r esults are summarized in

Table 6.5.1

.6

- 1 3 Table 6.5

. 1 Regional Wholesaler Markups for Furnaces

RECS Region State(s) Baseline

MU Incremental

MU

1 Connecticut, Maine, New Hampshire, Rhode Island, Vermont 1.368 1.078

2 Massachusetts 1.368 1.078

3 New York 1.368 1.078

4 New Jersey 1.368 1.112

5 Pennsylvania 1.366 1.109

6 Illinois 1.359 1.095

7 Indiana, Ohio 1.364 1.106

8 Michigan 1.364 1.106

9 Wisconsin 1.359 1.095

10 Iowa, Minnesota, North Dakota, South Dakota 1.359 1.095

11 Kansas, Nebraska 1.359 1.095

12 Missouri 1.359 1.095

13 Virginia 1.368 1.112

14 Delaware, District of Columbia, Maryland, West Virginia 1.367 1.111

15 Georgia 1.309 1.099

16 North Carolina, South Carolina 1.309 1.099

17 Florida 1.309 1.099

18 Alabama, Kentucky, Mississippi 1.329 1.102

19 Tennessee 1.309 1.099

20 Arkansas, Louisiana, Oklahoma 1.342 1.114

21 Texas 1.342 1.114

22 Colorado 1.359 1.095

23 Idaho, Montana, Utah, Wyoming 1.393 1.122

24 Arizona 1.397 1.124

25 Nevada, New Mexico 1.373 1.120

26 California 1.397 1.124

27a Oregon, Washington 1.397 1.124

27b Alaska 1.397 1.124

27c Hawaii 1.397 1.124

6.5.1.2 Estimation of Regional Mechanical Contractor Markups

The 2007 Economic Census provides Geographic Area Series for the Plumbing and

HVAC Contractors (NAICS 23822) sector, which contains state

- level sale and cost data

, including value of construction, cost of subcontract work, cost of materials, and payroll fo r construction workers. By using the equation mentioned in Section 6.1.1 , DOE was able to estimate baseline markups for each state. Because the Census does not prov ide more disaggregated cost data, DOE was not able to differentiate between invariant and variant cost

.6

- 14 Alternatively, DOE calculated the national baseline and incremental markups ( Table

6.4

. 2 ) and found the incremental markup is around 20 percent lower than the baseline markups.

DOE further derived the state

- level incremental markups by applying this ratio to the baseline markup in each state, assuming that this dev iation applies equally to all states. (Appendix 6

- A.4 contains the full set of data.)

In order to estimate the baseline and incremental markups for both replacement and new construction markets for each state, DOE applied the markup deviations (i.e., 4.4 p ercent higher and 2.9 percent lower for the replacement and new construction markets, respectively) derived in

Section 6.4.4.1 to the statewide baseline and incremental markups. DOE assumed that this deviation of replacement and new construction markets applies equally to the baseline and incremental markups.

Lastly, DOE divided all states among the 29 RECS regions and then calc ulated population

- weighted average baseline and incremental markups for mechanical contractors for each region, as shown in Table 6.5.2

.6

- 15 Table 6.5

. 2 Population

- Weighted Regional Mechanical Contractor Markups for Furnaces

RECS Region State(s) Replacement

Baseline

MU Replacement

Incremental

MU New

Construction

Baseline MU New

Construction

Incremental

MU

1 Connecticut, Maine, New Hampshire, Rhode Island,

Vermont 1.559 1.247 1.450 1.160

2 Massachusetts 1.538 1.231 1.431 1.145

3 New York 1.600 1.280 1.488 1.191

4 New Jersey 1.583 1.267 1.473 1.178

5 Pennsylvania 1.479 1.183 1.375 1.100

6 Illinois 1.577 1.262 1.467 1.173

7 Indiana, Ohio 1.562 1.250 1.453 1.162

8 Michigan 1.530 1.224 1.423 1.138

9 Wisconsin 1.510 1.208 1.404 1.123

10 Iowa, Minnesota, North Dakota, South Dakota 1.530 1.224 1.423 1.139

11 Kansas, Nebraska 1.460 1.168 1.358 1.087

12 Missouri 1.479 1.183 1.376 1.101

13 Virginia 1.557 1.246 1.448 1.158

14 Delaware, District of Columbia, Maryland, West Virginia 1.498 1.198 1.393 1.114

15 Georgia 1.474 1.179 1.371 1.096

16 North Carolina, South

Carolina 1.501 1.201 1.396 1.117

17 Florida 1.512 1.210 1.407 1.125

18 Alabama, Kentucky, Mississippi 1.526 1.220 1.419 1.135

19 Tennessee 1.477 1.182 1.374 1.099

20 Arkansas, Louisiana,

Oklahoma 1.542 1.233 1.434 1.147

21 Texas 1.498 1.198 1.393 1.115

22 Colorado 1.531 1.225 1.424 1.139

23 Idaho, Montana, Utah, Wyoming 1.491 1.192 1.386 1.109

24 Arizona 1.580 1.264 1.470 1.176

25 Nevada, New Mexico 1.537 1.230 1.430 1.144

26 California 1.607 1.286 1.495 1.196

27a Oregon, Washington 1.580 1.264 1.469 1.175

27b Alaska 1.766 1.413 1.642 1.314

27c Hawaii 1.835 1.468 1.707 1.3666

- 16 6.5.1.3 Estimation of Regional General Contractor Markups

In order to derive regional general contractor markups for the residential building construction sector from the 2007 Economic Census, DOE combined four Geographic Area Series: (1) New Single

- Family General Contractors (NAICS 236115), (2) New M ultifamily

H

ousing C onstruction (NAICS 236116), (3) New H ousing O perative B uilders (NAICS 236117), and (4) Residential R emodelers (NAICS 236118) . Each series consist s of statewide cost data required to calculate baseline markups for each state as illustrated in Section 6.1.1 . Although there is only a new construction (n o replacement) channel for general contractors, the same technique shown for mechanical contractors can still be employed to estimate regional baseline and incremental markups. First, DOE estimated the statewide incremental markups by applying

the ratio of national baseline and incremental markups (i.e. the national incremental markup is around 9.46 percent lower than the national baseline markup) to the baseline markups for each

state

. Lastly, DOE divided all states among the 29 RECS regions and then calcu lated population

weighted average baseline and incremental markups for general contractors for each region. The

final results are summarized in Table 6.5

. 3

.6

- 17 Table 6.5

. 3 Regional General Contractor Markups for Furnaces

RECS Region State(s) Baseline

MU Incremental

MU

1 Connecticut, Maine, New Hampshire, Rhode Island,

Vermont 1.410 1.277

2 Massachusetts 1.343 1.216

3 New York 1.393 1.261

4 New Jersey 1.503 1.361

5 Pennsylvania 1.362 1.233

6 Illinois 1.589 1.438

7 Indiana, Ohio 1.378 1.248

8 Michigan 1.537 1.392

9 Wisconsin 1.340 1.213

10 Iowa, Minnesota, North Dakota, South Dakota 1.372 1.243

11 Kansas, Nebraska 1.351 1.223

12 Missouri 1.325 1.200

13 Virginia 1.450 1.313

14 Delaware, District of Columbia, Maryland, West Virginia 1.443 1.307

15 Georgia 1.428 1.293

16 North Carolina, South Carolina 1.390 1.258

17 Florida 1.528 1.384

18 Alabama, Kentucky, Mississippi 1.355 1.227

19 Tennessee 1.353 1.225

20 Arkansas, Louisiana, Oklahoma 1.373 1.243

21 Texas 1.499 1.357

22 Colorado 1.499 1.357

23 Idaho, Montana, Utah, Wyoming 1.308 1.184

24 Arizona 1.707 1.546

25 Nevada, New Mexico 1.637 1.482

26 California 1.717 1.555

27a Oregon, Washington 1.464 1.325

27b Alaska 1.854 1.678

27c Hawaii 1.417 1.283

6.6 MARKUP FOR MANUFACTURED HOME GAS FURNACES

Based on the shipments forecast for 2018 (see c hapter 9), 50 percent of the manufactured home gas furnaces go to new construction, and the other 50 percent go to replacements . DOE

used Manufactured Home ( Mobile Home) Manufacturing (NAICS 321991) sector ( (14) and All6

- 18 Other Specialty Trade Contractors (NAICS 238990) sector (15) from the 2007 Economic Census to calculate markups for manufactured home gas furnace manufacturers and contractors respectively. The first industrial series includes revenue and expenses associated with making

manufactured home s , and the second series accounts expenses and revenue associated with performing manufactured ( mobile ) home setup and tie

- down work for new construction. The

detailed cost breakdown for manufactured home manufacturers and contractors and the final estimates for both baseline and incremental markups are listed in Table 6.6

. 1 and Table 6.6

. 2

.

Table 6.6

. 1 Manufactured Home Manufa cturer Expenses and Markups for New

Construction

Description Manufactured Home Manufacturer Expenses or Revenue

Per Dollar

Sales Revenue
$ Per Dollar

Cost of Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.71 1.00

Labor Expenses: Salaries (indirect) and benefits 0.08 0.11 Occupancy Expense: Rent, maintenance, and utilities 0.01 0.02 Other Operating Expenses: Depreciation, advertising, and insurance. 0.09 0.13

Net Profit Before Taxes 0.11 0.15 Baseline Markup ( MU MANUFACTURED HOME BASE ): Revenue per dollar cost of goods 1. 41 Incremental Markup ( MU MANUFACTURED HOME INCR ): Increased revenue per dollar increase cost of goods sold 1. 28

Source: U.S. Census Bureau. 2007. Manufactured Home ( Mobile Home) Manufacturing. Sector 31: 321991. Manufacturing: Industry Series: Preliminary Detailed Statistics for Establishments: 2007

As shown in the first column , the direct cost of sales represents about $0.71 per dollar

sales revenue to the manufactured home contractor. Labor expenses represent $0.08 per dollar sales revenue, occupancy expenses represent $0.01 per dollar sales revenue, other operating expenses represent $0.09, and profit makes up $0.11 per dollar sales revenue. DOE then

converted these e xpenses per dollar sales into revenue per dollar cost of goods sold, by dividing each figure in the first data column by $0.71. The data in column two show that, for every $1.00

the manufactured home gas furnace manufacturer spends on equipment costs, the manufactured home gas furnace manufacturer earns $1.00 in sales revenue to cover the equipment cost, $0.11 to cover labor costs, $0.02 to cover occupancy expenses, $0.13 for other operating expenses, and $0.15 in profits. Thus, the manufacturer baseline ma rkup for manufactured home gas furnaces ( MU MANUFACTURED HOME MFG BASE ) is 1.41. DOE believe s the labor and occupancy costs to be invariant and the other operating costs and profit to scale with the equipment price (i.e., be variant). In this case, for a $1 .00 increase in the equipment price, the manufacturer price for manufactured home gas furnaces will increase by $1. 28 , giving a manufactured home gas furnace manufacturer incremental markup ( MU MANUFACTURED HOME MFG INCR ) of 1. 28.6

- 19 Table 6.6

. 2 Manufactured Home Contractor Expenses and Markups for New

Construction

Description Manufactured Home Contractor Expenses or Revenue

Per Dollar

Sales Revenue
$ Per Dollar

Cost of Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.62 1.00 Labor Expenses: Salaries (indirect) and benefits 0.15 0.24 Occupancy Expense: Rent, maintenance, and utilities 0.03 0.05 Other Operating Expenses: Depreciation, advertising, and insurance. 0.11 0.18

Net Profit Before Taxes 0.08 0.13 Baseline Markup ( MU MANUFACTURED HOME BASE ): Revenue per dollar cost of goods 1. 61 Incremental Markup ( MU MANUFACTURED HOME INCR ): Increased revenue per dollar increase cost of goods sold 1. 31

Source: U.S. Census Bureau

. 200 7. All Other Specialty Trade Contractors . Sector 23: 238990 . Construction: Industry Series: Preliminary Detailed Statistics for Establishments: 2007

.

Analogously, DOE calculated these expenses per dollar sales into revenue per dollar cost of goods sold, by dividing each figure in the first data column by $0.62. The data in column two show that, for every $1.00 the manufactured home gas furnace contractor spends on equipment costs, the manufactured home gas furnace contractor earns $1.00 in sales revenue to cover the equipment cost, $0.24 to cover labor costs, $0.05 to cover occupancy expenses, $0.18 for other operating expenses, and $0.13 in profits. Thus, the contractor baseline markup for manufac tured home gas furnaces ( MU MANUFACTURED HOME CONT BASE ) is 1.61. DOE used the same assumption that the labor and occupancy costs are invariant and the other operating costs and profit to scale with the equipment price (i.e., be variant). In this case, for a $1.00 increase in the equipment price, the

contractor price for manufactured home gas furnace will increase by $1. 31 , giving a

manufactured home gas furnace contractor incremental markup ( MU MANUFACTURED HOME CONT INCR ) of

1. 31

.

Based on the distribution channel for manufactured home furnace s in the new construction market that DOE described in Figure 6.1.2, in order to derive the final retail price

for manufactured home gas furnaces, the total markup applied on the manufacturing price of heating equipmen t equals the product of manufacturer markup and contractor markup for

manufactured home gas furnaces. In this case, the baseline and incremental markups for

manufactured home gas furnaces installed for new construction are 2.27 and 1.68 respectively.

As fo r those units purchased for replacement, DOE used the same baseline and incremental markups estimated for non

- weatherized gas furnaces to apply to the manufacturing price of

hea t ing equipment , which are 2.11 and 1.37 respectively.6

- 20 6.7 SALES TAX

The sales tax represents state and local sales taxes that are applied to the consumer price of the equipment. The sales tax is a multiplicative factor that increases the consumer equipment price.

DOE derived state and local taxes from data provided by the Sales Tax Clearinghouse. (16)
These data represent weighted averages that include county and city rates. DOE then derived population

- weighted average tax values for each RECS region to match the regional markups for

wholesalers and mechanical and general contractors, as shown in Table 6.7

. 1 . Detailed sales tax data by each state can be found in a ppendix 6

- A. 6

.6

- 21 Table 6.7

. 1 Average Sales Tax Rates by RECS Region

RECS Region State(s) Population (July 2011) Tax Rate (2012)

%

1 Connecticut, Maine, New Hampshire, Rhode Island, Vermont 7,904,824 5.13

2 Massachusetts 6,587,536 6.25

3 New York 19,465,197 8.45

4 New Jersey 8,821,155 6.95

5 Pennsylvania 12,742,886 6.40

6 Illinois 12,869,257 8.10

7 Indiana, Ohio 18,061,873 6.87

8 Michigan 9,876,187 6.00

9 Wisconsin 5,711,767 5.45

10 Iowa, Minnesota, North Dakota,

South Dakota 9,915,184 6.86

11 Kansas, Nebraska 4,713,879 7.25

12 Missouri 6,010,688 7.25

13 Virginia 8,096,604 5.00

14 Delaware, District of Columbia, Maryland, West Virginia 8,919,645 5.59

15 Georgia 9,815,210 6.90

16 North Carolina, South Carolina 14,335,631 6.95

17 Florida 19,057,542 6.65

18 Alabama, Kentucky, Mississippi 12,150,608 7.13

19 Tennessee 6,403,353 9.45

20 Arkansas, Louisiana, Oklahoma 11,304,323 8.46

21 Texas 25,674,681 8.00

22 Colorado 5,116,796 6.40

23 Idaho, Montana, Utah, Wyoming 5,968,564 5.28

24 Arizona 6,482,505 8.15

25 Nevada, New Mexico 4,805,546 7.31

26 California 37,691,912 8.20

27a Oregon, Washington 10,701,897 5.62

27b Alaska 722,718 1.45

27c Hawaii 1,374,810 4.40

Population W eighted Average 7.116

- 22 6.8 OVERALL MARKUPS

The overall markup for each distribution channel is the product of the appropriate markups, as well as sales tax in the case of replacement applications ( Table 6.8

. 1 ).

DOE used the o verall baseline markup to estimate the consumer product price of baseline models, given the manufacturer cost of the baseline models. As stated previously , DOE considers baseline models to be product sold under existing market conditions (i.e., without new energy conservation standards). The following equation shows how DOE used the overall baseline markup to determine the product price for baseline models.



## ( **)**

BASE OVERALL MFG SALES BASE MFG MFG BASE 

### MU COST Tax MU MU COST CPP

_ 

### × **= ×**  **× ×**  **=**

Where:

CPP BASE = c onsumer product price for baseline models,

COST MFG = m anufacturer cost for baseline models,

MU MFG = m anufacturer markup,

MU BASE = b aseline replacement or new home channel markup,

Tax SALES = s ales tax (replacement applications only), and

MU OVERALL_BASE = b aseline overall markup.

Similarly, DOE used the overall incremental markup to estimate changes in the consumer product price, given changes in the manufacturer cost from the baseline model cost resulting from an energy conservation standard to raise product energy efficiency. The total consumer product price for more energy

- efficient models is composed of two components: the consumer product price of the baseline model and the change in consumer product price associated with the increase in manufacturer cost to meet the new energy conservation standard. The following equation shows how DOE used the overall incremental markup to determine the consumer product price for more energy

- efficient models (i.e., models meeting new energy conservation standards).



## ( **)**

INCR OVERALL MFG BASE SALES INCR MFG MFG BASE OVERALL MFG STD

MU COST CPP Tax MU MU COST MU COST CPP

_ _

**× ∆**  **+ =**  **× ×**  **× ∆**  **+ ×**  **=**

Where:

CPP STD = c onsumer product price for models meeting new energy conservation standards,

CPP BASE = c onsumer product price for baseline models,

COST MFG = m anufacturer cost for baseline models,

Δ COST MFG = c hange in manufacturer cost for higher energy efficient models,

MU MFG = m anufacturer markup,6

- 23 MU INCR = i ncremental replacement or new home channel markup,

Tax SALES = s ales tax (replacement applications only),

MU OVERALL_BASE = b aseline overall markup (product of manufacturer markup, baseline replacement or new home channel markup, and sales tax), and

MU OVERALL_INCR = i ncremental overall markup.

National average baseline and incremental markups for each market participant are

summarized in Table 6.8

. 1 and Table 6.8

. 2 for non

- manufactured home furnace fans and

manufactured home furnace fans

, respectively . Based on furnace shipment forecasts for the year 2018 (see chapter 9), DOE estimated that 25 percent of gas and electric furnaces, 50 percent of

manufactured home gas and electric furnaces, 10 percent of oil

- fired furnaces , and 25 percent of hydronic air handlers go to new construction. On t he other hand, 75 percent of gas and electric furnaces, 50 percent of manufactured home gas and electric furnaces, 90 percent of oil

- fired

furnaces , and 75 percent of hydronic air handlers go to the replacement market. By weighing the markups by the market shares for each type of furnace and market , total markups are listed in

Table 6.8.3

Table 6.8

. 1 Summary of National Average Markups on Non

- Manufactured Home

Furnace Fans

Baseline Markup Incremental Markup

Manufacturer 1. 35 1. 35

Wholesaler 1.36 1.11

Mechanical Contractor

(new construction/replacement) 1.44/1.55 1.15/1.23

General Contractor

(new construction only) 1.48 1.34

Sales T ax 1.071 1.0716

- 24 Table 6.8

. 2 Summary of National Average Markups on Manufactured Home Furnace

Fans

Baseline Markup Incremental Markup

Manufacturer 1.30 1.30

Wholesaler (replacement only) 1.36 1.11

Mechanical Contractor

( replacement only ) 1.55 1.23

Manufactured Home Manufacturer

(new construction only) 1.41 1.28

Manufactured Home Contractor

(new construction only) 1.61 1.31

Sales T ax 1.071 1.071

Table 6.8

. 3 Summary of Total Markup by Furnace Fan Product Class

Product Class Baseline Markup Incremental Markup

Non

- weatherized, Non

- condensing Gas

Furnaces 2. 49 1.59

Non

- weatherized, Condensing Gas

Furnaces 2. 4 5 1.54

Weatherized Gas Furnace 2. 46 1. 57

Oil Furnace 2. 3 0 1. 4 6

Electric Furnace / Modular Blower 2. 41 1. 5 4

Manufactured Home Non

- weatherized,

Non

- condensing Gas Furnaces 3. 0 4 2. 35

Manufactured Home Non

- weatherized, Condensing Gas Furnaces 2. 9 6 2. 2 9

Manufactured Home Electric Furnace

/Modular Blower 2. 9 5 2. 2 8

Hydr on ic Air Handler (Heat/Cool) 2. 62 1. 656

- 25 REFERENCES

1. Alpine Home Air Product. [Online] Decemebr 2011. http://www.alpinehomeair.com/viewcategory.cfm?categoryID=309.

2. First Co. [Online] December 2011. http://www.firstco.com/sales_offices/index.asp.

3. MM Comfort System. [Online] D ecember 2011. http://www.mmcomfortsystems.com/catalog/products/cbwmv

- variable

- speed

- hydronic

- air

handler.

4. 2005 Financial Analysis for the HVACR Contracting Industry. s.l. : Air Conditioning

Contractor of America.

5. Heating, Air Conditioning & Refrigeration Distributors International 2011 Profit Report.

6. U.S. Census Bureau, 2007, Manufacturing Industry Series: Detailed Statistics for the United

States: 2007. Air

- Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refri geration Equipment Mnufacturing. Data set for Sector 31: EC073111 .

7. U.S. Census Bureau, 2007, Wholesale Trade: Industry Series: Preliminary Summary Statistics for the United States: 2007. HVAC Equipment Merchant Wholesaler. Data set for Sector 42:

EC0 742111.

8. U.S. Census Bureau, 2007, Data set for Sector 23: EC0723I1, Construction: Industry Series, Preliminary Detailed Statistics for Establishments: 2007.

9. U.S. Census Bureau, Data set for Sector 23, EC0723A1, Construction: Geographic Area

Serie s, Detailed Statistics for Establishments. 2007.

10. Pindyck, R. and Rubinfeld, D. Microeconomics. Prentice Hall, 2000.

11. U.S. Census Bureau. 2007. Plumbing, Heating, and Air

- Conditioning Contractors. Sector 23: 238220. Construction: Industry Series, P reliminary Detailed Statistics for Establishments,

2007.

12. U.S. Census Bureau. 2007. Construction: Industry Series: Preliminary Detailed Statistics for Establishments: 2007. New Single

- Family General Contractors, New Multifamily Housing Construction (E xcept Operative Builders), New Housing Operative Builders Resi.

13. 2009 Residentail Energy Consumption Survey . U.S. Energy Information Administration,

2009.6

- 26 14. U.S. Census Bureau. 2007. Manufactured Home ( Manufactured Home) Manufacturing.

Sector 31: 321991. Manufacturing: Industry Series, Preliminary Detailed Statistics for
Establishments, 2007.

15. U.S. Census Bureau. 2007. All Other Specialty Trade Contractors. Sector 23: 238990. Construction: Industry Series, Preliminary Detailed Statistics for Establishments, 2007.

16. The Sales Tax Clearinghouse. [Online] https://thestc.com/STRates.stm.