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 Sales Tax Rates ......................................................................................... 6-12
 

Table 6.7.1 Baseline Markups by Distribution Channel and Overall Weighted Average 

Markup, Including the Weighted Average Sales Tax Multiplier ....................... 6-13
 

Table 6.7.2 Incremental Markups by Distribution 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 Refrigeration Equipment ............................................. 6-11
 

6-i 
 

CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION 

6.1 INTRODUCTION 

To carry out the life-cycle cost (LCC) calculations described in chapter 8, the 

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

walk-in coolers and freezer units (WICFs). This cost was determined for both baseline 

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

promulgation of new standards. However, the customer price of such equipment is not known 

because it depends on how the equipment is purchased. 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 applying 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 distribution 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 through 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 contractor. The distributor, in this case, may be a dealer focusing on 

refrigeration equipment or foodservice equipment or a grocery warehouser (supply-chain 

distributor) who sells food and stores equipment to the grocery store. In some cases, the 

manufacturer may distribute the walk-ins directly to mechanical contractors, 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 distribution 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 and 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 dedicated refrigeration equipment. 

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

Figure 6.1.2 Distribution Channels and Shares 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 different 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 selling smaller walk-in systems for the foodservice segment. A further key 

feature of the distribution network in food-service equipment is the presence of buying groups, 

which are dealer associations formed with the intent of consolidating purchases. Ten active 

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buying 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-in 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 manufacturer through a national account: 

EQPCUST = MFGBASE x MUNATL ACCT x (1+ ST) Eq. 6.1 

where: 

EQPCUST = equipment price to the customer ($), 

MFGBASE = manufacturer selling price of baseline equipment ($), 

MUNATL 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 distributor distribution channel: 

EQPCUST = MFGBASE x MUDISTR x (1+ST) Eq. 6.2 

where: 

MUDISTR = Distributor markup. 

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

mechanical contractor sells the equipment to the customer through the distributor distribution 

channel: 

6-3 
 

 

 

 

EQPCUST = MFGBASE x MUDISTR x MUMECH CONT x (1+ ST) Eq. 6.3 

where: 

MUMECH CONT = residential and light 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 tax 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: 

EQPNATL ACCNT BASE = MFGBASE x MUNATL ACCT BASE x (1+ST) Eq. 6.4 

where: 

EQPNATL ACCNT BASE = national account price to the customer of baseline equipment ($), 

and 

MUNATL ACCT BASE = national account markup on baseline equipment. 

If sold to a customer by a distributor: 

EQPDISTR BASE = MFGBASE x MUDISTR BASE x (1+ST) Eq. 6.5 

If sold to a customer by a mechanical contractor: 

EQPMECH CONT BASE = EQPDISTR BASE x MUMECH CONT BASE Eq. 6.6 

where: 

EQPDISTR BASE = distributor price of baseline equipment ($), 

EQPMECH CONT BASE = mechanical contractor price of baseline equipment ($), and 

MUMECH CONT BASE = mechanical contractor markup on baseline equipment. 

The use of the markups results in the distributor (EQPDISTR BASE) and mechanical contractor 

(EQPMECH CONT BASE) prices of the baseline WICF equipment. 

6.1.2 Incremental Markups 

Incremental markups are cost multipliers that relate incremental changes in the 

manufacturer selling price of higher efficiency equipment that result, in this case, from efficiency 

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improvements, to changes in the distributor or contractor 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: 

EQPNATL ACCNT INCR = MFG INCR x MUNATL ACCT INCR x (1+ST) Eq. 6.7 

where: 

EQPNATL ACCNT INCR 

MFG INCR 

MUNATL 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: 

EQPDISTR INCR = MFGINCR x MUDISTR INCR x (1+ ST) Eq. 6.8 

EQPMECH CONT INCR = EQPDISTR INCR x MUMECH CONT INCR Eq. 6.9 

where: 

EQPDISTR INCR = incremental distributor price ($), 

EQPMECH CONT INCR = incremental mechanical contractor price ($), 

MUDISTR INCR = incremental distributor markup, and 

MUMECH CONT INCR = incremental mechanical contractor markup. 

In these equations, MUNATL ACCTINCR, MUDISTR INCR, and MUMECH CONT INCR refer to the 

incremental national account, incremental distributor, and incremental mechanical contractor 

markups, respectively, which are applied to the incremental MSP. The use of the incremental 

markups results in the incremental distributor (EQPDISTR INCR) and incremental mechanical 

contractor (EQPMECH CONT INCR) prices. 

6.1.3 Overall Markups 

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

the manufacturer selling price to the customer price as indicated by the following equations: 

EQPCUST BASE = MFGBASE x (WTNATL ACCNT BASE x MUNATL ACCT BASE + WTDISTR BASE x MUDISTR BASE + 

WTMECH CONT BASE x MUDISTR BASE x MUMECH CONT BASE) x (1+ST) 

= MFGBASE x MUOVERALL BASE Eq. 6.10 

EQPCUST INCR = MFGINCR x (WTNATL ACCNT INCR x MUNATL ACCT INCR + WTDISTR INCR x MUDISTR INCR + 

WTMECH CONT INCR x MUDISTR INCR x MUMECH CONT INCR) x (1+ST) 

= MFGINCR x MUOVERALL INCR Eq. 6.11 

6-5 
 

 

 

 

EQPCUST = EQPCUST BASE + EQPCUST INCR	 Eq. 6.12 

where: 

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

weights and baseline markups for each step of the distribution 

channel, 

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

weights and incremental markups for each step of the distribution 

channel, 

EQPCUST BASE = baseline customer price ($), 

EQPCUST INCR = incremental customer price ($), 

EQPCUST = total customer price ($), 

WTNATL ACCNT BASE = weight (percent) of baseline equipment sales through national 

accounts, 

WTDISTR BASE = weight (percent) of baseline equipment sales through distributors, 

WTMECH CONT BASE = weight (percent) of baseline equipment sales through mechanical 

contractors, 

WTNATL ACCNT INCR = weight (percent) of higher efficiency equipment sales through 

national accounts, 

WTDISTR INCR = weight (percent) of higher efficiency equipment sales through 

distributors, and 

WTMECH CONT INCR = weight (percent) of higher efficiency equipment sales through 

mechanical contractors. 

Using the overall baseline and overall incremental markups results in the baseline 

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

higher efficiency level that increases the manufacturer selling price of equipment, the total price 

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

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

6.2	 BASIC ASSUMPTIONS USED TO ESTIMATE DISTRIBUTOR AND 

MECHANICAL CONTRACTOR MARKUPS 

DOE derived the distributor and mechanical contractor markups from three key 

assumptions about WICF costs. DOE based the 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-sheet data for the foodservice equipment 

distributors even though there is an industry association (FEDA) and several other dealer groups. 

DOE obtained the industry balance sheet data from the Heating, Air conditioning & 

Refrigeration Distributors International (HARDI), the trade association 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 Contractors 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 

6-6 
 

install 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 divided 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 prices vary in proportion to distributor and contractor costs 

included in the balance sheets. 

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

cost categories, including direct costs to purchase or install the equipment, operating labor and 

occupancy costs, and other operating costs and profit. Although distributors and contractors tend 

to handle multiple commodity lines (including air conditioners, furnaces, and boilers), the data 

provide the most accurate available indication of WICF equipment costs. 

Previous DOE analysis of the HVAC distributors, 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 according to the quantity of labor and 

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

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

vary more in relation to sales volume than in relation to other factors, including appliance 

efficiency. Distribution-channel labor inputs also vary more with sales volume than with 

appliance cost or efficiency. DOE assumed a division of costs between those that do not scale 

with the manufacturer selling price (labor and 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 commercial 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 example, 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 data 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 goods 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 terms of industry median values. DOE presents 

these data for Controls and Refrigeration distributors in terms of specific types of expense within 

these categories in appendix 6A. Table 6.3.1 summarizes these expenses as cost per dollar sales 

6-7 
 

 

revenue in the first data column. As shown in this column, the direct equipment expenses (cost of 

goods sold) represent about $0.688 per dollar sales revenue. In other words, for every $1 

distributors take in as sales revenue, 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, and 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 (MUWHOLE BASE) 1.453 

Incremental Revenue: Increased revenue per dollar increase cost of goods sold $1.118 

Incremental Markup (MUWHOLE 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 data 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 occupancy 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 (MUWHOLE BASE) is 

approximately 1.453 ($1.453 ÷ $1.00). 

DOE also used the data in the last column to estimate the incremental markups. The 

incremental markup depends on which of the costs in Table 6.3.1 are variable and which are 

fixed. For example, for a $1.00 increase in the manufacturer 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 the incremental markup is 1.453, or the same as 

the baseline markup. However, if none of the other 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 (MUWHOLE 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 financial data. Based on the analysis of U.S. Census Bureau data for 

distributors, DOE calculated a standard deviation of 4.2 percent. DOE assumed that the variation 

determined for the baseline markup applied to the incremental markup as well. For the baseline 

6-8 
 

 

 

markup of 1.453, a standard deviation of 4.2 percent 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 actually pass through distributors. The case-to-case 

deviation of distributor markup thus 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 details of these data are shown in appendix 6A. 

6.4 ESTIMATION OF MECHANICAL CONTRACTOR MARKUPS 

DOE derived markups for mechanical contractors from U.S. Census Bureau data for 

PHAC contractors (North American Industry Classification System 238220). This sector 

includes establishments primarily engaged in installing and servicing PHAC equipment, which 

may include new work, additions, alterations, maintenance, and repairs. The U.S. Census Bureau 

data for the PHAC sector include detailed statistics 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 expenses for an average or typical contracting 

business. As with the data for distributors, Table 6.4.1 summarizes the expenses for mechanical 

contractors, as expenses per dollar sales revenue, in the first data 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 account for $0.17 per dollar sales revenue, occupancy 

expenses account for $0.02 per dollar sales revenue, other operating expenses account for $0.03, 

and profit makes up $0.12 per 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 contractor spends on equipment costs, 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 (MUMECH 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 (MUWHOLE BASE): Revenue per dollar cost of goods sold 1.52 

Incremental Markup (MUWHOLE 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. 

6-9 
 

 

DOE was also able to use the data in the 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, implying 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 $1.00 increase in the mechanical contractor price, 

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

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

case, for a $1.00 increase in the equipment price, the mechanical contractor price will increase by 

$1.23, giving a mechanical contractor incremental markup (MUMECH CONT INCR) of 

1.23 ($1.23 ÷ $1.00). 

6.4.1 Estimation of Mechanical Contractor Markup Probability Distribution 

Mechanical contractor costs differ 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 differ systematically by State, DOE characterized the markups 

developed 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 and 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., supermarkets may be more prevalent relative to 

convenience stores in one part of the country than another), a national-level distribution of the 

mechanical contractor markup index is different for each class of building. 

Figure 6.4.1 shows the cumulative probability distribution of the State markup index that 

DOE used to characterize the mechanical contractor baseline and incremental markups. 

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1.35 1.4 1.45 1.5 1.55 1.6 1.65 1.7

Cumulative Percentage 

Markup 

Figure 6.4.1	 Cumulative National Sales-Weighted 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 6.5.1Error! 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 percent. DOE applied sales taxes to the customer 

equipment price irrespective of the distribution channel and the market 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 the tax rates in Table 6.5.1Error! 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. 

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Table 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 percent 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 related 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 distribution 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 equipment 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 chose a value of one-half. 

To further illustrate the methods for estimation 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 distributor (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– 

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$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-half of $453). The resulting equipment price is 

$1,226 ($226 + $1,000), which results in a deduced 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 national account markups 

described above by the weighted average sales tax multiplier to obtain the overall baseline and 

incremental markups shown in Table 6.7.1 and Table 6.7.2. DOE based overall markups on one 

of three distribution channels according to how the equipment is purchased: through a national 

account; a distributor; or a distributor and a mechanical contractor. Also included is the State into 

which the WICF unit is delivered. Table 6.7.1 presents 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 Distribution 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 Distribution 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 the customer price of baseline equipment, 

given the manufacturer cost of baseline equipment. For example, if the manufacturer selling 

price 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 

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sold is $1,506. Similarly, DOE used the overall incremental 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. 

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REFERENCES 

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 Equipment Standards, Chapter 6: 

Technical Support Documents, Commercial Refrigeration Equipment, Final Rule 2009 

(http://www1.eere.energy.gov/buildings/appliance_standards/commercial/refrig_equip_final_rul 

e_tsd.html) 

4

 U.S. Census Bureau. 2002. Plumbing, Heating 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, Hardware, 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 & Refrigeration 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). 

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