CHAPTER 7. MARKUPS FOR EQUIPMENT PRICE DETERMINATION 

TABLE OF CONTENTS 

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

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

7.1.1.1 Residential Products....................................................................................... 7-1
 

7.1.1.2 Commercial Clothes Washers........................................................................ 7-1
 

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

7.1.2.1 Approach for Manufacturer Markups ............................................................ 7-3
 

7.1.2.2 Approach for Retailer and Distributor Markups............................................ 7-3
 

7.1.2.3 Overall Markup.............................................................................................. 7-5
 

7.2 MANUFACTURER MARKUPS .................................................................................... 7-6
 

7.3 RETAILER MARKUP FOR RESIDENTIAL COOKING PRODUCTS....................... 7-7
 

7.4 DISTRIBUTOR MARKUPS FOR COMMERCIAL CLOTHES WASHERS............... 7-8
 

7.5 SALES TAXES ............................................................................................................. 7-10
 

7.6 SUMMARY OF MARKUPS ........................................................................................ 7-11
 

LIST OF TABLES 

Table 7.2.1 Major Appliance Manufacturer Gross Margins and Markups............................. 7-7
 

Table 7.3.1 Data Used to Calculate Retailer Markups for Residential Cooking
 

Products................................................................................................................ 7-8
 

Table 7.4.1 Data Used to Calculate Distributor Markups for Commercial Clothes
 

Washers................................................................................................................ 7-9
 

Table 7.4.2 Distributor (Mac-Gray) Baseline Markup for Commercial Clothes
 

Washers.............................................................................................................. 7-10
 

Table 7.5.1 Average Sales Tax Rates by Census Division and Large State ......................... 7-11
 

Table 7.5.2 Average Sales Tax Rates by Product ................................................................. 7-11
 

Table 7.6.1 Summary of Markups ........................................................................................ 7-12
 

LIST OF FIGURES 

Figure 7.1.1 Distribution Channel for Commercial Clothes Washers ..................................... 7-2
 

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CHAPTER 7. MARKUPS FOR EQUIPMENT PRICE DETERMINATION 

7.1 INTRODUCTION 

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

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

applying a multiplier called a “markup” to the manufacturers’ equipment costs estimated in the 

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

equipment. 

DOE developed one set of markups for residential cooking products and another set for 

commercial clothes washers. 

7.1.1 Distribution Channels 

The appropriate markups for determining the consumer equipment price depend on the 

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

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

their business costs and profit margin. 

7.1.1.1 Residential Products 

For residential products, DOE based the distribution channels on data from the 

Association of Home Appliance Manufacturers (AHAM).1 AHAM estimates that 93 percent of 

residential cooking products are sold through retail outlets. Because an overwhelming majority 

of products are sold through retail outlets, DOE assumed that all of the residential products are 

purchased by consumers from retail outlets. 

7.1.1.2 Commercial Clothes Washers 

For commercial clothes washers, DOE based the distribution channels (see Figure 7.1.1) 

on data developed by the Consortium for Energy Efficiency (CEE).2 The CEE states that the 

relevant portions of the commercial, family-sized clothes washer market can be divided into 

three areas: laundromats; private multi-family housing; and large institutions. Included as part of 

large institutions are military barracks, universities, housing authorities, lodging establishments, 

and health care facilities. For these three market areas, the CEE data indicate that an 

overwhelming majority of commercial clothes washers are sold through either distributors or 

route operators. Laundromats generally purchase their equipment through distributors while 

multi-family housing and large institutions generally lease their equipment from route operators. 

For purposes of developing the markups for commercial clothes washers, DOE based its 

calculations on the distribution channel that involves only distributors. DOE assumed that the 

markups and the resulting consumer equipment prices determined for the distribution channel 

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involving distributors would be representative of the prices paid by consumers acquiring their 

equipment from route operators. 

Source: CEE, 1998 

Figure 7.1.1 Distribution Channel for Commercial Clothes Washers 

7.1.2 Markup Calculation Procedure 

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

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

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

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

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

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

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

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

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

the market. 

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In developing markups for manufacturers, retailers, and distributors, DOE obtained data 

about the revenue, CGS, and expenses of firms that produce and sell the products of interest. 

DOE’s approach categorizes the expenses into two categories: labor-scaling costs (LSC), which 

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

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

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

NLSC represent the gross margin. 

7.1.2.1 Approach for Manufacturer Markups 

DOE uses manufacturer markups to transform a manufacturer’s equipment costs into a 

manufacturer sales price. Using the CGS and gross margin, DOE calculated the manufacturer 

markup (MUMFG) with the following equation: 

CGS MFG + GMMFG MU MFG = 

CGS MFG

where: 

MUMFG = Manufacturer markup,
 

CGSMFG = Manufacturer’s cost of goods sold, and
 

GMMFG = Manufacturer’s gross margin.
 

7.1.2.2 Approach for Retailer and Distributor Markups 

DOE based the retailer markups (for residential products) and distributor markups (for 

commercial clothes washers) on financial data from the U.S. Census Business Expenditure 

Survey. DOE organized the financial data into balance sheets that break down cost components 

incurred by firms that sell the products.a The key assumptions that DOE used to estimate the 

retailer and distributor markups using these financial data were: 

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

home appliances and commercial clothes washers. 

2.	 These costs can be divided into two categories: 

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

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

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

are included in the balance sheets. 

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

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

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

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

data provide the most accurate available indication of home appliance and commercial clothes 

washer expenses. 

Information obtained from the trade literature pertaining to the heating, ventilation, and 

air-conditioning (HVAC) contracting industry tends to support the second assumption. This 

information indicates that retailer and distributor markups should vary according to the quantity 

of labor and materials used to sell or distribute the equipment, with markups on labor tending to 

be much larger than markups on materials.3 This information also describes markups as varying 

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

efficiency. This last finding strongly suggests that labor inputs vary more with sales volume than 

with appliance cost or efficiency. In the discussion that follows in sections 7.3 and 7.4, DOE 

assumes a division of costs between those that do not scale with the manufacturer sales price 

(fixed costs—labor and occupancy expenses referred to above as LSC), and those that do 

(variable costs—operating expenses and profit referred to above as NLSC). This division of 

costs led to the estimate of retailer and distributor markups described below in sections 7.3 and 

7.4. 

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

competitive, and consumer demand for residential home appliances and commercial clothes 

washers is relatively inelastic, i.e. the demand is not expected to decrease significantly with a 

relatively small increase in price. The large number of household appliance stores and merchant 

wholesalers of service equipment (i.e., distributors of products including commercial clothes 

washers) listed by the U.S. Census Bureau in its Statistics of U.S. Businesses indicates the 

competitive nature of the market.4 For example, there are more than 10,000 household appliance 

store establishments and over 5000 merchant wholesaler establishments of service equipment in 

the U.S.b Following standard economic theory, competitive firms facing inelastic demand either 

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

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

transform the manufacturer sales price into a consumer equipment price. DOE used the baseline 

markups, which cover all of a retailer’s or distributor’s costs (i.e., both LSC and NLSC), to 

determine the sales price of baseline models. The baseline markup relates the manufacturer sales 

price to the retailer sales price (in the case of residential products) or distributor sales price (in 

the case of commercial clothes washers). DOE considers baseline models to be equipment sold 

under existing market conditions (i.e., without new energy efficiency standards). DOE 

calculated the baseline markup (MUBASE) for retailers and distributors using the following 

equation: 

b DOE determined the number of establishments for household appliance stores based on the following North 

American Industry Classification System (NAICS) code and description: 443111, Household Appliance Stores. 

DOE determined the number of establishments for distributors of commercial clothes washers based on the 

following NAICS code and description: 42385, Service Establishment Equipment and Supplies Merchant 

Wholesalers. 

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CGS + GM CGS + ( LSC + NLSC ) RTL / DIST RTL / DIST RTL / DIST RTL / DIST RTL / DIST MUBASE = = CGSRTL / DIST CGSRTL / DIST

where: 

MUBASE = Baseline retailer or distributor markup,
 

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

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

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

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

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

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

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

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

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

for retailers and distributors using the following equation: 

CGS RTL / DIST + NLSCRTL / DIST MUINCR = CGSRTL / DIST

where: 

MUINCR = Incremental retailer or distributor markup,
 

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

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

7.1.2.3 Overall Markup 

The overall markup is the product of the manufacturer, retailer, and distributor markups, 

as well as sales taxes. 

DOE used the overall baseline markup to estimate the consumer equipment price of 

baseline models, given the manufacturer cost of the baseline models. As stated above, DOE 

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

new energy efficiency standards). The following equation shows how DOE used the overall 

baseline markup to determine the equipment price for baseline models. 

EQPBASE = COSTMFG × (MU MFG × MUBASE ×Tax SALES ) = COSTMFG × MUOVERALL _BASE

where: 

EQPBASE = Consumer equipment price for baseline models,
 

COSTMFG = Manufacturer cost for baseline models,
 

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MUMFG = Manufacturer markup, 

MUBASE = Baseline retailer or distributor markup, 

TaxSALES = Sales tax, and 

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

retailer or distributor markup, and sales tax). 

Similarly, DOE used the overall incremental markup to estimate changes in the consumer 

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

from a standard to raise equipment efficiency. The total consumer equipment price for higherefficiency models is composed of two components: the consumer equipment price of the baseline 

model and the change in consumer equipment price associated with the increase in manufacturer 

cost to meet the new efficiency standard. The following equation shows how DOE used the 

overall incremental markup to determine the consumer equipment price for higher-efficiency 

models (i.e., models meeting new efficiency standards). 

EQP = COST × MU + ΔCOST × (MU × MU ×Tax ) STD MFG OVERALL _BASE MFG MFG INCR SALES

= EQPBASE + ΔCOSTMFG × MUOVERALL _ INCR

where: 

EQPSTD = Consumer equipment price for models meeting new efficiency 

standards, 

EQPBASE = Consumer equipment price for baseline models, 

COSTMFG = Manufacturer cost for baseline models, 

ΔCOSTMFG = Change in manufacturer cost for higher-efficiency models, 

MUMFG = Manufacturer markup, 

MUINCR = Incremental retailer or distributor markup, 

TaxSALES = Sales tax, 

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

retailer or distributor markup, and sales tax), and 

MUOVERALL_INCR = Incremental overall markup (product of manufacturer markup, 

incremental retailer or distributor markup, and sales tax). 

7.2 MANUFACTURER MARKUPS 

DOE developed an average manufacturer markup by examining the annual Securities and 

Exchange Commission (SEC) 10-K reports filed by four publicly-traded manufacturers primarily 

engaged in appliance manufacturing and whose combined product range includes residential 

cooking products and commercial clothes washers.6 The four manufacturers represent a nearly 

50 percent market share fore core appliances. Because these companies are typically diversified, 

producing a range of different appliances, an industry average markup was assumed by DOE to 

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be representative for the manufacture of each type of appliance. DOE evaluated markups for the 

years between 2002 and 2005, inclusive. 

Table 7.2.1 lists the average corporate gross margin during the years from 2002 to 2005, 

and corresponding markups, for each of the four manufacturers. 

Table 7.2.1 Major Appliance Manufacturer Gross Margins and Markups 

Mfr A Mfr B Mfr C Mfr D 

Average Net Revenues (Million) $372 $280 $4770 $12,682 

Corporate Gross Margin 15% 28% 16% 22% 

Markup 1.18 1.39 1.19 1.28 

Source: SEC 10-K reports (2002-2005) 

The average markup value based on these four companies is 1.26. 

7.3 RETAILER MARKUP FOR RESIDENTIAL COOKING PRODUCTS 

DOE used financial data from the U.S. Census Business Expenditure Survey (BES), in 

the “Household Appliance Stores” category, to calculate markups used by retailers that apply to 

residential cooking products.c 7 Table 7.3.1 shows the BES data that DOE used and the retail 

markups for these appliances that DOE estimated following the procedures described above. 

c DOE used the 1997 BES because the 2002 BES did not contain sufficient data for the calculation of gross margin 

or cost of goods sold. 

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Table 7.3.1 Data Used to Calculate Retailer Markups for Residential Cooking Products
 

Item Million Dollars 

Sales (revenue) 10343 

Cost of Goods Sold (CGS) 7151 

Gross Margin (GM) 3193 

Labor-Scaling Costs (LSC) 

Payroll 1366 

Fringe Benefits 208 

Contract Labor 69 

Taxes and License Fees 53 

Lease and Rental Payments 238 

Telephone and Communications 58 

Utilities 70 

Repair and Maintenance 36 

LCS Subtotal: 2098 

Non-Labor-Scaling Costs (NLSC) 

Depreciation and Amortization 94 

Office Supplies 37 

Packaging and Other Materials 0 

Advertising Services 274 

Legal Services 8 

Accounting, Auditing, and Bookkeeping 19 

Computer Related Services 10 

Other Operating Expenses 389 

Net Profit Before Taxes 263 

NLCS Subtotal: 1094 

Baseline Markup (MUBASE) = (CGS+GM)/CGS 1.45 

Incremental Markup (MUINCR) = (CGS+NLSC)/CGS 1.15 

7.4 DISTRIBUTOR MARKUPS FOR COMMERCIAL CLOTHES WASHERS 

DOE used financial data from the BES for the category “Machinery, Equipment, and 

Supplies Merchant Wholesalers” to calculate markups used by distributors for commercial 

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clothes washers.d 8 Table 7.4.1 shows the data from the BES and the distributor markups DOE 

estimated using the procedures described above. 

Table 7.4.1	 Data Used to Calculate Distributor Markups for Commercial Clothes 

Washers 

Item Million Dollars 

Sales (revenue) 225425 

Cost of Goods Sold (CGS) 158097 

Gross Margin 67328 

Labor-Scaling Costs (LCS): 

Payroll 25904 

Fringe Benefits 3233 

Contract Labor 954 

Taxes and License Fees 823 

Lease and Rental Payments 2932 

Telephone and Communications 1185 

Utilities 705 

Commissions Paid 963 

Contract Work 958 

Repair and Maintenance 826 

LCS Subtotal: 38483 

Non-Labor-Scaling Costs (NLCS): 

Depreciation and Amortization 2650 

Office Supplies 885 

Packaging and Other Materials 346 

Advertising Services 959 

Legal Services 277 

Accounting, Auditing, and Bookkeeping 346 

Computer Related Services 403 

Other Operating Expenses 8149 

Net Profit Before Taxes 14830 

NCLS Subtotal: 28845 

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

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

d DOE used the 1997 BES was used because the 2002 BES did not contain sufficient data for the calculation of gross 

margin or cost of goods sold. Also, because complete financial data were not available for the category Service 

Establishment Equipment and Supplies Merchant Wholesalers, DOE used data from the classification of Machinery, 

Equipment, and Supplies Merchant Wholesalers which encompasses a broader set of merchant wholesalers. 

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As a check on the above markup values for distributors, DOE calculated markups based 

on the annual report of one distributor company (Mac-Gray) within this sector.e 9 The report 

includes data regarding revenue and CGS for this company, but not a breakdown of other 

expenses. As a result, it was only possible to estimate a baseline markup. Table 7.4.2 below 

shows the data for the commercial clothes washer distributor from the annual report as well as 

the baseline distributor markup DOE estimated for the sector as a whole using the procedures 

described above. The average value of 1.27 over the 2000–2004 time period for one company is 

lower than the value of 1.43 developed from the Census data. Although this one company has a 

lower baseline markup than that determined with the Census data, DOE decided to base its 

distributor markups on the Census data because this data is supposed to be representative of all 

distributors of commercial clothes washers. 

Table 7.4.2 Distributor (Mac-Gray) Baseline Markup for Commercial Clothes Washers 

Firm Year Revenue Cost of goods sold Baseline Markup 

Mac-Gray Services 

Inc. 

2000 154268 119120 1.30 

2001 152069 121127 1.26 

2002 150368 117956 1.27 

2003 149656 118349 1.26 

2004 182694 145080 1.26 

Average Baseline Markup 1.27 

Source: Mac-Gray Services Inc. 2004 annual report. 

7.5 SALES TAXES 

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

equipment 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.10 

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

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

Table 7.5.1 below. 

e Mac-Gray also serves the multi-family sector and can also be considered a route operator. 

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

Census Division/State Tax Rate 

New England 4.98% 

Mid Atlantic 6.07% 

East North Central 6.56% 

West North Central 6.65% 

South Atlantic 5.95% 

East South Central 7.85% 

West South Central 8.30% 

Mountain 6.46% 

Pacific 4.97% 

New York State 8.25% 

California 7.95% 

Texas 7.95% 

Florida 6.70% 

DOE then derived U.S. average tax values for each product (as shown in Table 7.5.2 

below) based on the product’s saturation within each Census division and large state. It 

determined the saturations from the DOE Energy Information Administration (EIA)’s 2001 

Residential Energy Consumption Survey.11 Note that the range of tax rates is relatively 

narrow—ranging from a low of 6.83 percent for microwave ovens to a high of 7.07 percent for 

gas non-self-cleaning ovens. 

Table 7.5.2 Average Sales Tax Rates by Product 

Product Tax Rate 

Commercial clothes washers 6.84% 

Cooking products 

Electric cooktops 6.70% 

Gas cooktops 7.06% 

Electric non-self-cleaning ovens 6.74% 

Electric self-cleaning ovens 6.64% 

Gas non-self-cleaning ovens 7.07% 

Gas self-cleaning ovens 6.98% 

Microwave ovens 6.83% 

7.6 SUMMARY OF MARKUPS 

Table 7.6.1 summarizes the markups at each stage in the distribution channel and the 

overall baseline and incremental markups, as well as sales taxes, for each product. 

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Table 7.6.1 Summary of Markups
 

Cooking Products Commercial Clothes Washers 

Markup Baseline Incr. Baseline Incr. 

Manufacturer 1.26 1.26 

Retailer 1.45 1.15 - -

Distributor - - 1.43 1.18 

Sales Tax 1.069* 1.0684 

Overall 1.95 1.55 1.93 1.59 

* Represents average of all seven product classes of cooking products. 

The example for microwave ovens, provided below, illustrates how DOE used the 

baseline and incremental markups to derive a consumer equipment price. Assuming the 

baseline manufacturer cost is $120 and the change in manufacturer cost to meet a given energy 

efficiency standard is $10, the resulting baseline consumer equipment price (EQPBASE) and 

higher-efficiency equipment price (EQPSTD) are: 

EQP = COST × (MU × MU × Tax ) BASE MFG MFG BASE SALES 

= $120 ×1.26 ×1.45 ×1.069 = $234 

EQP = EQP + ΔCOST × (MU × MU × Tax ) STD BASE MFG MFG INCR SALES 

= $234 + $10 ×1.26 ×1.15 ×1.069 = $234 + $15 = $249 

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REFERENCES
 

1	 Association of Home Appliance Manufacturers. AHAM 2003 Fact Book, 2003. Washington, 

DC. p. 25. 

2	 Consortium for Energy Efficiency, Commercial Family-Sized Washers: An Initiative 

Description of the Consortium for Energy Efficiency, 1998. Boston, MA. 

<http://www.cee1.org/com/cwsh/cwsh-main.php3> 

3	 Skaer, M. What should you charge? Try these Tested Formulas. The Air Conditioning, 

Heating, and Refrigeration News, 2001. 

<http://www.achrnews.com/CDA/ArticleInformation/features/BNP_Features_Item/0,1338,23113,00.html> 

4	 U.S. Census Bureau. Statistics of U.S. Businesses, 2004. Washington, DC. 

<http://www.census.gov/csd/susb/susb04.htm> 

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

6	 Security Exchange Commission, SEC 10-K Reports, Various dates, 2002-2005, Security 

Exchange Commission. <http://www.sec.gov/> 

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

Household Appliance Stores, 1997. Washington, DC. 

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

8	 U.S. Census Bureau. 1997 Economic Census, Business Expenses Survey Merchant 

Wholesalers, Machinery, Equipment, and Supplies, 1997. Washington, DC. 

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

9	 Mac-Gray Corporation. 2004 Annual Report, 2004. Waltham, MA. 

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

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

11	 U.S. Department of Energy-Energy Information Administration. Residential Energy 

Consumption Survey, 2001 Public Use Data Files, 2001. Washington, DC. 

<http://www.eia.doe.gov/emeu/recs/recs2001/publicuse2001.html> 

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