CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

TABLE OF CONTENTS

6.1 INTRODUCTION

.............................................................................................................. 6-1
6.1.1 Baseline Markups

................................................................................................. 6-4
6.1.2 Incremental Markups

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

.................................................................................................. 6-5
6.2 BASIC ASSUMPTIONS USED TO ESTIMATE DISTRIBUTOR AND
MECHANICAL CONTRACTOR MARKUPS

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

.............................................................. 6-7
6.4 ESTIMATION OF MECHANICAL CONTRACTOR MARKUPS

.................................. 6-9
6.4.1 Estimation of Mechanical Contractor Markup Probability Distribution

........... 6-10
6.5 SALES TAX

..................................................................................................................... 6-11
6.6 NATIONAL ACCOUNTS

............................................................................................... 6-12
6.7 OVERALL MARKUP RESULTS

................................................................................... 6-13
REFERENCES

.................................................................................................................... ...... 6-15

LIST OF TABLES

Table 6.1.1 Distribution Channel Shares

................................................................................ 6-3
Table 6.3.1 Distributor Expenses and Markups

...................................................................... 6-8
Table 6.4.1 Mechanical Contractor Expenses and Markups*

................................................. 6-9
Table 6.5.1 State Sale s Tax Rates

......................................................................................... 6-1 2
Table 6.7.1 Baseline Markups by Distribution Cha nnel and Overall Weighted Average Markup, Including the Weighted Average Sales Tax Multiplier

....................... 6-13
Table 6.7.2 Incremental Markups by Distributi on Channel and Overall Weighted Average Markup, Including the Weighted Average Sales Tax Multiplier

........ 6-13

LIST OF FIGURES

Figure 6.1.1 Distribution Channels and Shares for WICF used in Grocery/Supermarkets

...... 6-2 Figure 6.1.2 Distribution Channels and Shares for WICF Used in Foodservice

..................... 6-2 Figure 6.4.1 Cumulative National Sales-Weighted Distribution of Mechanical Contractor Markups for Re frigeration Equipment

............................................. 6-11

6-iCHAPTER 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) needed to de termine the cost to the customer of baseline walk-in coolers and freezer units (WICFs). Th is cost was determined for both baseline equipment and more-efficient equipment th e customer would purchase following the promulgation of new standards. However, the cu stomer price of such equipment is not known because it depends on how the equipment is pur chased. What is known is the manufacturer’s selling price (MSP) for both baseline equipment and the more-efficient equipment as determined in the Engineering Analysis (chapter 5). By a pplying a multiplier called a “markup” to the MSP, DOE was able to estimate the customer price of equipment purchased through various distribution channels for different market segments. This chapter describes how DOE derived the markups.

The cost to the customer depends on how the customer purchases the equipment. In the framework document, DOE defined three di stribution channels described below:

Manufacturer Æ Customer (National Account) (Channel 1)
Manufacturer Æ Distributor Æ Customer (Channel 2)
Manufacturer Æ Distributor Æ Mechanical Contractor Æ Customer (Channel 3)

In the first distribution channel, it was envisaged that the manufacturer sells the equipment directly to the customer throug h a national account, often a large grocery or supermarket chain. In the second and third distribution channels, it was presumed that the manufacturer sells the equipment to a distributor, who in turn may sell it directly to the customer or through a mechanical contract or. The distributor, in this case, may be a dealer focusing on refrigeration equipment or foodservice equi pment or a grocery warehouser (supply-chain distributor) who sells food and st ores equipment to the grocery store. In some cases, the manufacturer may distribute the walk -ins directly to mechanical cont ractors, in effect functioning
as a distributor. Based on the feedback received from the stakeholders during the public meeting and DOE’s own study of the distribution chain, DOE realized that for the WICF systems, the
distribution channels for the two broad market segments, viz., the grocery segment and the food service segments, are somewhat different. The di stribution channels for refrigeration equipment are shown for the grocery segment in Figure 6.1.1 and for the foodservice segment in Figure 6.1.2. The corresponding walk-in cooler an d freezer “envelopes” are assumed to follow the same distribution channels; i. e., if an envelope is sold with a unit cooler only (remote condenser), then it follows the same distribution channel as the multiplex refrigeration equipment. If the envelope is sold with a dedicated refrigeration system, then it follows the same
distribution channels as the dedi cated refrigeration equipment.

6-1Figure 6.1.1 Distribution Channels and Shares for WICF used in Grocery/Supermarkets

Figure 6.1.2 Distribution Channels and Sh ares for WICF Used in Foodservice

It is seen from Figure 6.1.1 and Figure 6.1.2 that the distribution networks for the two different product segments follow somewhat differe nt paths though there is overlap at times. One instance of possible overlap is when a distribution intermediary for the refrigeration equipment
also has an interest in sellin g smaller walk-in systems for the foodservice segment. A further key
feature of the distribution network in food-servi ce equipment is the presence of buying groups,
which are dealer associations formed with th e intent of consolidating purchases. Ten active

6-2buying groups are listed by the Foodservice Equipment Dealers Association (FEDA). 1 For the smaller walk-in systems used in the foodservice segment, there are several E-commerce resellers who offer a choice of new and used equipment. FEDA in their policy statement denounces such activity. 2

Table 6.1.1 gives the estimated distribution channel shares (in percentage of total sales) through each of the main distribution channels for multiplex and dedicated equipment. It is
assumed that the channel shares for the walk-i n systems used in the grocery and convenience store segments would shadow similar figures for the commercial refrigeration equipment that serves identical market segments. Consequently , the channel shares for the grocery market segment in Table 6.1.1 are based on DOE’s estimates for the commercial refrigeration equipment. 3 The channel market shares for the WICF used in the foodservice segments are
estimates.

Table 6.1.1 Distribution Channel Shares

Dominant Market Segment Multiplex Equipment
All National Account Distributor Contractor
70% 15% 15% Dedicated Equipment
Convenience Stores and Groceries (50%) National Account Distributor Contractor
30% 35% 35% Food Service (50%) E-Commerce Reseller Distributor Contractor
10% 80% 10%

The following equation describes how DOE determined the equipment price if a customer purchases directly from the ma nufacturer through a national account:

EQP CUST = MFG BASE x MU NATL ACCT x (1+ ST) Eq. 6.1

where:

EQP CUST = equipment price to the customer ($),
MFG BASE = manufacturer selling price of baseline equipment ($),

MU NATL ACCT = national account markup, 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 di stributor distribution channel:

EQP CUST = MFG BASE x MU DISTR x (1+ ST ) Eq. 6.2

where:

MU DISTR = Distributor markup.

The following equation describes how DOE determined the equipment price if a mechanical contractor sells the equipment to th e customer through the distributor distribution
channel:

6-3EQP CUST = MFG BASE x MU DISTR x MU MECH CONT x (1+ ST ) Eq. 6.3

where:

MU MECH CONT = residential and ligh t commercial mechanical contractor markup.

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

For each of the markups presented above, DOE further differentiated between a baseline markup and an incremental markup, as described below. The overall markup is then the product of all the markups plus sales ta x within a distribution channel.

6.1.1 Baseline Markups

DOE defined baseline markups as cost multipliers that relate the purchase cost to selling price for each step of the distribution channel.

If sold to a customer by the manufacturer through a national account, the following equation defines the equipment price:

EQP NATL ACCNT BASE = MFG BASE x MU NATL ACCT BASE x (1+ST) Eq. 6.4

where:

EQP NATL ACCNT BASE = national account price to the cust omer of baseline equipment ($),
and
MU NATL ACCT BASE = national account markup on baseline equipment.

If sold to a customer by a distributor:

EQP DISTR BASE = MFG BASE x MU DISTR BASE x (1+ST) Eq. 6.5

If sold to a customer by a mechanical contractor:

EQP MECH CONT BASE = EQP DISTR BASE x MU MECH CONT BASE Eq. 6.6

where:

EQP DISTR BASE = distributor price of ba seline equipment ($), EQP MECH CONT BASE = mechanical contractor price of baseline equipment ($), and

MU MECH CONT BASE = mechanical contractor markup on baseline equipment.

The use of the markups results in the distributor ( EQP DISTR BASE ) and mechanical contractor ( EQP MECH CONT BASE ) prices of the baseline WICF equipment.

6.1.2 Incremental Markups

Incremental markups are cost multipliers th at relate incremental changes in the manufacturer selling price of higher efficiency equipment that result, in this case, from efficiency

6-4improvements, to changes in the distributor or c ontractor sales price, as shown in the following equations:

If sold to a customer by the manufacturer through a national account, the following equation defines the increase in equipment price above that of baseline equipment:

EQP NATL ACCNT INCR = MFG INCR x MU NATL ACCT INCR x (1+ST) Eq. 6.7

where:

EQP NATL ACCNT INCR MFG INCR

MU NATL ACCT INCR =

=

= incremental equipment price to the national account customer ($), change in the manufacturer selling price of higher efficiency equipment brought about by an increase in efficiency due to new standards ($), and national account incremental markup.

If sold by a distributor directly to a customer or by a mechanical contractor after passing through a distributor:

EQP DISTR INCR = MFG INCR x MU DISTR INCR x (1+ ST) Eq. 6.8

EQP MECH CONT INCR = EQP DISTR INCR x MU MECH CONT INCR Eq. 6.9

where:

EQP DISTR INCR = incremental distri butor price ($), EQP MECH CONT INCR = incremental mechanical contractor price ($),

MU DISTR INCR = incremental distributor markup, and
MU MECH CONT INCR = incremental mechanical contractor markup.

In these equations, MU NATL ACCTINCR, MU DISTR INCR, and MU MECH CONT INCR refer to the incremental national account, incremental distribut or, and incremental mechanical contractor markups, respectively, which are applied to the incremental MSP. The use of the incremental markups results in the incremental distributor ( EQP DISTR INCR ) and incremental mechanical contractor ( EQP MECH CONT INCR ) prices.

6.1.3 Overall Markups

Overall markups, including bot h overall baseline a nd overall incrementa l markups, relate the manufacturer selling price to the customer price as indicated by the following equations:

EQP CUST BASE = MFG BASE x ( WT NATL ACCNT BASE x MU NATL ACCT BASE + WT DISTR BASE x MU DISTR BASE + WT MECH CONT BASE x MU DISTR BASE x MU MECH CONT BASE ) x (1+ ST )

= MFG BASE x MU OVERALL BASE Eq. 6.10

EQP CUST INCR = MFG INCR x (WT NATL ACCNT INCR x MU NATL ACCT INCR + WT DISTR INCR x MU DISTR INCR + WT MECH CONT INCR x MU DISTR INCR x MU MECH CONT INCR ) x (1+ ST )

= MFG INCR x MU OVERALL INCR Eq. 6.11

6-5EQP CUST = EQP CUST BASE + EQP CUST INCR Eq. 6.12

where:

MU OVERALL BASE = overall weighted baseline markup th at is the product of all the weights and baseline markups for each step of the distribution channel,
MU OVERALL INCR = overall weighted incremental mar kup that is the product of all the weights and incremental markups fo r each step of the distribution channel, EQP CUST BASE = baseline customer price ($), EQP CUST INCR = incremental customer price ($), EQP CUST = total customer price ($),

WT NATL ACCNT BASE = weight (percent) of baseline equipment sales through national
accounts,
WT DISTR BASE = weight (percent) of baseline e quipment sales through distributors,
WT MECH CONT BASE = weight (percent) of baseline e quipment sales through mechanical
contractors,
WT NATL ACCNT INCR = weight (percent) of higher efficiency equipment sales through national accounts,
WT DISTR INCR = weight (percent) of higher efficiency equipment sales through distributors, and
WT MECH CONT INCR = weight (percent) of higher efficiency equipment sales through
mechanical contractors.

Using the overall baseline and overall incr emental markups results in the baseline customer price ( EQP CUST BASE ) and the incremental customer price ( EQP CUST INCR ). For a particular higher efficiency level that increases the manufacturer selling price of equipment, the total price of the equipment to the customer ( EQP CUST ) is the sum of the baseline customer price ( EQP CUST BASE ) and the incremental customer price ( EQP CUST INCR ).

6.2 BASIC ASSUMPTIONS USED TO ESTIMATE DISTRIBUTOR AND
MECHANICAL CONTRACTOR MARKUPS

DOE derived the distributor and mechani cal contractor markups from three key assumptions about WICF costs. DOE based th e distributor markups for the refrigeration intermediary on industry balance-sheet data for an industry association and based the mechanical contractor markups on U.S. Census Bureau data for the plumbing, heating, and air conditioning (PHAC) industry. 4 DOE was not able to obtain balance-sh eet data for the foodservice equipment distributors even though there is an industry asso ciation (FEDA) and several other dealer groups. DOE obtained the industry balance sheet da ta from the Heating, Air conditioning & Refrigeration Distributors Interna tional (HARDI), the trade associ ation representing distributors of refrigeration and heating, ventilating, and air conditioning (HVAC) equipment, specifically the controls and refrigeration specialists within that organization. DOE put the U.S. Census Bureau Plumbing, Heating, and Air-Conditioning C ontractors data that was used for developing mechanical contractor markups into the same format as the balance sheet data for distributors. These balance sheets break out the components of all costs incurred by firms that supply and

6-6install PHAC equipment. The three key assumptions used to estimate markups using these financial data are given below.

1. The firm balance sheets accurately represent the various average costs incurred by firms distributing and installing WICF equipment.

2. The distributor and contractor costs can be di vided into two categories: (1) costs that vary in proportion to the MSP of WICF equipment (variable costs); and (2) costs that do not vary with the manufacturer selling price of WICF equipment (fixed costs).

3. Distributor and contractor pr ices vary in proportion to dist ributor and contractor costs
included in the balance sheets.

In support of the first assumption, the balan ce sheets itemize firm costs into a number of cost categories, including direct costs to purchase or install th e equipment, operating labor and occupancy costs, and other operating costs and pr ofit. Although distributor s and contractors tend to handle multiple commodity lines (including ai r conditioners, furnaces, and boilers), the data provide the most accurate available indication of WICF equipment costs.

Previous DOE analysis of the HVAC distributor s, contractors, and consultants, including information obtained from the trade literature, support the second assumption. 5,6 This analysis
indicates that distributor and contractor markups vary acco rding 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 dist ribution-channel markups vary more in relation to sales volume than in relation to other factor s, including appliance efficiency. Distribution-channel labor inputs also vary more with sales volume than with appliance cost or efficiency. DOE assumed a di vision of costs between those that do not scale with the manufacturer selling price (labor a nd occupancy costs) and those that do (other operating costs and profit). This division of costs led to the estimate of distributor and mechanical contractor markups described below.

In support of the third assumption, the HVAC distributor and contractor industry is competitive, and customer demand for commercia l heating and air conditioning is relatively inelastic ( i.e., the demand is not expected to decrease significantly with an increase in price of equipment). The large number of distributor firms listed in the 2002 Census indicates the competitive nature of the market. For exam ple, there are almost 1,400 distributors of refrigeration equipment, and 87,000 HVAC contractors. 7 Following standard economic theory, competitive firms facing inelastic demand either set prices in line with costs or quickly go out of
business. 8

6.3 ESTIMATION OF DISTRIBUTOR MARKUPS

Distributors report median da ta in a confidential survey that HARDI conducted of
member firms. 9 In the survey, HARDI itemized revenues and costs into cost categories, including direct equipment expenses (cost of g oods sold), labor expenses, occupancy expenses, other operating expenses, and profit. It reported data for various industry segments, including the Controls and Refrigeration industry segment in te rms of industry median values. DOE presents
these data for Controls and Refri geration distributors in terms of specific types of expense within these categories in appendix 6A. Table 6.3.1 summar izes these expenses as cost per dollar sales

6-7revenue in the first data column. As shown in this column, the direct equipment expenses (cost of goods sold) represent about $0.688 per dollar sa les revenue. In other words, for every $1
distributors take in as sales re venue, they use $0.688 to pay the direct equipment costs. Labor expenses account for $0.195 per dollar sales revenue, occupancy expenses account for $0.036, other operating expenses account for $0.048, a nd profit accounts for $0.033 per dollar sales

revenue.

Table 6.3.1 Distributor Expenses and Markups

Descriptions Per Dollar
Sales Revenue Per Dollar Cost of
Goods Direct Cost of Equipment Sales: Cost of goods sold $0.688 $1.000 Labor Expenses: Salaries and benefits $0.195 $0.283 Occupancy Expense: Rent, maintenance, and utilities $0.036 $0.052 Other Operating Expenses: Depreciation, advertising, and insurance. $0.048 $0.070

Profit $0.033 $0.048
Baseline Revenue: Baseline revenue earned per dollar cost of goods sold $1.453 Wholesaler Baseline Markup ( MU WHOLE BASE ) 1.453
Incremental Revenue: Increased revenue per dollar increase cost of goods sold $1.118 Incremental Markup ( MU WHO L E INCR ) 1.118 Source: Heating, Air Conditioning & Refrigeration Distributors International. 2008. 2008 Profit Report (2007 Data). 2

The last column of Table 6.3.1 shows the da ta converted from costs per dollar revenue into revenue per dollar cost of goods sold. DOE did this conversion by dividing each cost category in the first data column of Table 6.3.1 by $0.688 ( i.e., equipment expenditure per dollar revenue). The data in the last column show that, for every $1.00 the distributor spends on equipment costs, the distributor spends $1.00 in sales revenue to cover the equipment cost, $0.283 to cover labor costs, $0.052 to cover o ccupancy expenses, $0.070 for other operating expenses, and $0.048 in profits. This totals to $1.453 in sales revenue earned for every $1.00 spent on equipment costs. Therefore, the distributor baseline markup ( MU WHOLE BASE ) is approximately 1.453 ($1.453 ÷ $1.00).

DOE also used the data in the last colu mn to estimate the incremental markups. The incremental markup depends on which of the co sts in Table 6.3.1 are variable and which are fixed. For example, for a $1.00 increase in the manuf acturer equipment price, if all of the other costs scale with the manufacturer selling price ( i.e., all costs are variable), the increase in distributor price will be $1.453, implying that th e incremental markup is 1.453, or the same as the baseline markup. However, if none of the othe r costs are variable, then a $1.00 increase in the manufacturer selling price will lead to a $1.00 increase in the distributor price, for an incremental markup of 1.0. DOE assumes that the labor and occupancy costs will be fixed and that the other operating costs and profit will scale with the manufacturer selling price ( i.e., be variable). In this case, for a $1.00 increase in the manufacturer selling price, the distributor price will increase by $1.118, giving a distributor incremental markup ( MU WHOLE INCR ) of
1.118 ($1.118 ÷ $1.00).

DOE recognizes that there is a possibility of case-to-case deviation in the markups developed from the above financia l data. Based on the analysis of U.S. Census Bureau data for distributors, DOE calculated a sta ndard deviation of 4.2 percent. DOE assumed that the variation
determined for the baseline ma rkup applied to the incremental markup as well. For the baseline

6-8markup of 1.453, a standard deviation of 4.2 percen t translates into an absolute value of 0.061, and for the incremental markup of 1.118, a standard deviation of 4.2 percent translates into an absolute value of 0.047. However, the national data on distribution of WICF units suggests that only about 15 percent of new units sold actuall y pass through distributors. The case-to-case deviation of distributor markup t hus has a very small impact on the overall cost of equipment and can be neglected. DOE applied the same baseline and incremental markup to all sales of WICF units passing through distributors. Further deta ils of these data are shown in appendix 6A.

6.4 ESTIMATION OF MECHANICAL CONTRACTOR MARKUPS

DOE derived markups for mechanical contra ctors from U.S. Census Bureau data for PHAC contractors (North Amer ican Industry Classification System 238220). This sector
includes establishments primarily engaged in installing and servicing PHAC equipment, which may include new work, additions, alte rations, maintenan ce, and repairs. The U.S. Census Bureau
data for the PHAC sector include detailed statis tics for establishments with payrolls, similar to the data reported by HARDI for distributors. The primary difference is that the U.S. Census Bureau reports itemized revenues and expenses for the PHAC industry as a whole in total dollars rather than in typical values for an average or representative business. Because of this, DOE
assumed that the total dollar values that the U. S. Census Bureau reported, once converted to a percentage basis, represented revenues and ex penses for an average or typical contracting business. As with the data for distributors, Ta ble 6.4.1 summarizes the expenses for mechanical contractors, as expenses per dolla r sales revenue, in the first da ta column (appendix 6A contains the full set of data). The direct cost of sales represents about $0.66 per dollar sales revenue to the mechanical contractor. Labor expenses acc ount for $0.17 per dollar sales revenue, occupancy expenses account for $0.02 per dollar sales reve nue, other operating expenses account for $0.03, and profit makes up $0.12 pe r dollar sales 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 $0.66. The data in the last column show that, for every $1.00 the mechanical cont ractor spends on equipment cost s, the mechanical contractor earns $1.00 in sales revenue to cover the equipment cost, $0.26 to cover labor costs, $0.03 to cover occupancy expenses, $0.05 for other operating expenses, and $0.18 in profits. This totals $1.52 in sales revenue earned for every $1.00 spent on equipment costs. This results in a mechanical contractor baseline markup ( MU MECH CONT BASE ) of 1.52 ($1.52 ÷ $1.00).

Table 6.4.1 Mechanical Contractor Expenses and Markups*

Description Mechanical Contractor Firm Expenses or Revenue
Per Dollar
Sales Revenue Per Dollar Cost
of Goods Sold Direct Cost of Equipment Sales: Cost of goods sold Labor Expenses: Salaries (indirect) and benefits Occupancy Expense: Rent, maintenance, and utilities Other Operating Expenses: Depreciation, advertising, and insurance
Net Profit Before Taxes $0.66 $0.17 $0.02 $0.03 $0.12 $1.00 $0.26 $0.03 $0.05 $0.18 Baseline Markup ( MU WHOLE BASE ): Revenue per dollar cost of goods sold 1.52 Incremental Markup ( MU WHOLE INCR ): Increased revenue per dollar increase cost of goods sold 1.23

* Source: U.S. Census Bureau. 2002. Plumbing, Heating, and Air-Conditioning Contractors: 2002. Report EC02-231-238220, Table 4. Detailed
Statistics for Establishments: 2002.

6-9DOE was also able to use the data in th e last column in Table 6.4.1 to estimate the incremental markups by being able to separate 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 mechanical contractor price will be $1.52, implyin g that the incremental markup is 1.52, 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 $1.0 0 increase in the mechani cal contractor price, for an incremental markup of 1.0. DOE assumes th e labor and occupancy co sts 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 mechanical contractor price will increase by $1.23, giving a mechanical contractor incremental markup ( MU MECH CONT INCR ) of
1.23 ($1.23 ÷ $1.00).

6.4.1 Estimation of Mechanical Contract or Markup Probab ility Distribution

Mechanical contractor costs di ffer in various regions of the country for reasons including availability of labor, cost of living, union versus non-union workforce, and others. Because many
mechanical contractor costs di ffer systematically by State, DOE characterized the markupsdeveloped from U.S. Census Bureau data with a probability distribution based on a State-byState analysis of U.S. Census Bureau data for PHAC contractors. The State-by-State analysis provided a distribution on the relative markups of mechanical contractors in the United States. DOE then applied the State-level index to the single-point baseline a nd incremental markups
calculated above to create State- level markups. Because the State- by-State distribution of WICF units varies by type of customer (e.g., supe rmarkets may be more prevalent relative to convenience stores in one part of the country th an another), a national-le vel distribution of the mechanical contractor markup index is di fferent for each class of building.

Figure 6.4.1 shows the cumulative probability distribu tion of the State markup index that
DOE used to characterize th e mechanical contractor base line and incremental markups.

6-100% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1.35 1.4 1.45 1.5 1.55 1.6 1.65 1.7Cumulative Percentage

Markup

Figure 6.4.1 Cumulative National Sales-Weight ed Distribution of Mechanical Contractor Markups for Refrigeration Equipment

6.5 SALES TAX

The sales tax represents State and local sales taxes that are applied to the customer price of WICF units. The sales tax is a multiplicative factor 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, 10 shown in Table 6.5.1 Error! Reference source not found.

. The State level combined tax rates can be applied to the estimated value of State level WICF equipment shipments to obtain the total purchase cost to the customer located in any State.

The distribution of sales tax rates ranges from a minimum of zero percent to a maximum of 9.4 percent with a mean value of 6.8 percen t. DOE applied sales taxes to the customer equipment price irrespective of th e distribution channel and the mark et in which the customer is
located.

A weighted-average national level sales tax rate is calculated by multiplying the shares of State level shipments by th e tax rates in Table 6.5.1 Error! Reference source not found. . The distribution of sales tax rates ranges from a minimum of zero percent to a maximum of 9.4 percent with a population-weighted mean value of 6.99 percent. DOE applied sales taxes to the customer equipment price irrespective of the distribution channel and the market in which the
customer is located.

6-11Table 6.5.1 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 8.75% Ohio 6.85%

Arizona 7.15% Maine 5.00% Oklahoma 8.10%

Arkansas 8.20% Maryland 6.00% Oregon 0.00%

California 9.00% Massachusetts 5.00% Pennsylvania 6.25%

Colorado 6.40% Michigan 6.00% Rhode Island 7.00%

Connecticut 6.00% Minnesota 6.85% South Carolina 7.05%

Delaware 0.00% Mississippi 7.00% South Dakota 5.50%

Dist. of Columbia 5.75% Missouri 7.105% Tennessee 9.40%

Florida 6.70% Montana 0.00% Texas 8.05% 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 8.75%

Indiana 7.00% New Mexico 6.40% West Virginia 6.00%

Iowa 6.80% New York 8.25% Wisconsin 5.40%

Kansas 6.90% North Carolina 6.80% Wyoming 5.40%

6.6 NATIONAL ACCOUNTS

Equipment purchased through national accounts constitutes about 70 pe rcent of the usual distribution of WICF equipment to customers. Large customers of WICF equipment use national accounts to circumvent the typical distribution channel, thereby allowing them to negotiate significantly lower equipment prices directly with the manufacturer. The manufacturer in turn must cover additional expenses re lated to the distribution (as opposed to the manufacture) of the equipment, but gains in terms of negotiating agreed-upon sales volumes with the customer.

To capture the price savings realized from equipment purchased through national accounts, DOE derived a national account markup, assuming that the resulting equipment price
increase was one half of that realized from a dist ribution through the distributor channel. In other words, if the price increase resulting from the distributor markups is $100, the national account markup is such that the price increase is one-half of that, or $50. DOE based the use of a national account markup that is one-half of that realized from the distributor distribution channel on the assumption that the resulting national account eq uipment price must fall somewhere between the manufacturer selling price ( i.e., a markup of 1.0) and the customer price under the distributor
distribution channel. Because DOE did not know typical values for the actual national account equipment price, it chos e a value of one-half.

To further illustrate the methods for estima tion of the national account markup, this section provides the following example of how DOE derived the national account markups. For example, using a baseline manufacturer selling price of $1,000 for a WICF unit delivered to a supermarket and baseline distributor markups of 1.453, the resulting baseline customer equipment price for sales through a distribut or (without sales taxes) is $1,453 ($1,000 × 1.453).
The dollar value increase due to the above distribution channel markups is $453 ($1,453–

6-12$1,000). Under the assumption that national account customers realize equipment price increases equal to one-half of that through the distribution channel, the dollar value of the equipment price increase under the national account is $226 (one-hal f of $453). The resulting equipment price is $1,226 ($226 + $1,000), which results in a dedu ced national account baseline markup of approximately 1.226 ($1,226 ÷ $1,000) . A similar calculation results in a deduced national account incremental markup of 1.059 ($1,059 ÷ $1,000).

6.7 OVERALL MARKUP RESULTS

DOE multiplied the distributor, mechanical contractor, and nati onal account markups described above by the weighted average sales tax multiplier to obtain th e overall baseline and incremental markups shown in Table 6.7.1 and Table 6.7.2. DOE based ov erall markups on one of three distribution channels according to how the equipment is purchased: through a national account; a distributor; or a distribut or and a mechanical contractor. Also included is the State into which the WICF unit is delivered. Table 6.7.1 pr esents three overall markups for the overall baseline markup for both multiplex and dedicated -system equipment, and Table 6.7.2 presents the same information for overall incremental markups.

Table 6.7.1 Baseline Markups by Distributio n Channel and Overall Weighted Average Markup, Including the Weighted Average Sales Tax Multiplier

Distributor Mechanical
Contractor

(Includes Distributor) National Account (Mfg Direct) Overall Weighted Average Markup Multiplex Equipment Dedicated Equipment
Distributor(s) Markup 1.453 2.209 1.226 1.408 1.828

Sales Tax Multiplier 1.070 1.070 1.070 1.070 1.070

Overall Markup 1.555 2.364 1.311 1.506 1.955

Table 6.7.2 Incremental Markups by Dist ribution Channel and Overall Weighted Average Markup, Including the Weighted Average Sales Tax Multiplier

Distributor Mechanical
Contractor

(Includes Distributor) National Account (Mfg Direct) Overall Weighted Average Markup Multiplex Equipment Dedicated Equipment
Distributor(s) Markup 1.118 1.375 1.059 1.115 1.252

Sales Tax Multiplier 1.070 1.070 1.070 1.070 1.070

Overall Markup 1.196 1.471 1.133 .1.193 1.340

DOE used the overall markups to estimate th e customer price of baseline equipment, given the manufacturer cost of baseline equipment. For example, if the manufacturer sellingprice of a baseline multiplex WICF unit is $1,000, DOE can multiply this by the weightedaverage overall baseline markup to estimate that the baseline customer price of the WICF unit

6-13sold is $1,506. Similarly, DOE used the overall in cremental markup to estimate changes in the customer price, given changes in the manufacturer selling price above the baseline due to increases in equipment efficiency. For example, if a new standard for multiplex equipment increases the CRE manufacturer selling price by $100, DOE can multiply this price ($100) by the weighted-average overall incremental markup (1.252) to estimate a customer price increase of $125.

These markups will be used with the MSPs to generate customer prices for commercial refrigeration equipment. Supporting data for calculating baseline and incremental markups are provided in appendix 6A.

6-14REFERENCES

1 http://www.feda.com/buying/list.cfm (Retrieved 16th September, 2009)

2 http://www.feda.com/dealer/policy.cfm (Retrieved 16th September, 2009)

3 U.S. Department of Energy, Appliance and Commercial Equi pment Standards, Chapter 6: Technical Support Documents, Commercial Refrigeration E quipment, Final Rule 2009 ( http://www1.eere.energy.gov/buildings/appliance_ standards/commercial/re frig_equip_final_rul e_tsd.html)

4 U.S. Census Bureau. 2002. Plumbing, Hea ting and Air-Conditioning Contractors (PHAC):

2002. Report EC-02-231-238220.

5 Lawrence Berkeley National Laboratory (LBNL) 2004. An Analysis of Price Determination

and Markups in the Air-Conditioning and Heating Equipment Industry. LBNL-52791.

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

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

7 U.S. Census Bureau. 2002. Electrical, Hard ware, Plumbing, and Heating Equipment and

Supplies: 2002. Report EC-02-421-17.

8 Pindyck, R. and D. Rubinfield. 2000. Microeconomics, Prentice-Hall.

9 Heating, Air Conditioning & Refrigerati on Distributors International (HARDI). 2008. 2008

Profit Report (2007 Data).

10 The Sales Tax Clearinghouse at https://thestc.com/STRates.stm (Accessed on June 4, 2009).

6-15