CHAPTER 7. MARKUPS FOR EQUIPMENT PRICE DETERMINATION 

TABLE OF CONTENTS 

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

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

7.1.2 Markup Calculation Procedure ........................................................................................ 7-1 

7.1.2.1 Approach for Manufacturer Markups............................................................ 7-2 

7.1.2.2 Approach for Retailer Markups.....................................................................7-2 

7.1.2.3 Overall Markup.............................................................................................. 7-4 

7.2 MANUFACTURER MARKUPS .................................................................................... 7-5 

7.3 RETAILER MARKUP FOR RESIDENTIAL COOKING PRODUCTS....................... 7-6 

7.4 SALES TAXES ............................................................................................................... 7-7 

7.5 SUMMARY OF MARKUPS .......................................................................................... 7-8 

LIST OF TABLES 

Table 7.2.1 Major Appliance Manufacturer Gross Margins and Markups............................. 7-6 

Table 7.3.1 Data Used to Calculate Retailer Markups for Residential Cooking 

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

Table 7.4.1 Average Sales Tax Rates by Census Division and Large State ........................... 7-8 

Table 7.4.2 Average Sales Tax Rates by Product................................................................... 7-8 

Table 7.5.1 Summary of Markups .......................................................................................... 7-9 

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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 all residential cooking products. 

The technical support document (TSD) for DOE’s notice of proposed rulemaking 

(NOPR) covered conventional cooking products (i.e., cooktops and ovens), microwave ovens, 

and commercial clothes washers (CCW).1

 This chapter presents information and results 

pertaining solely to conventional cooking products and microwave ovens. The impact of moreefficient equipment on CCW markups and consumer prices will be addressed in a subsequent 

TSD. 

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. 

DOE based the distribution channels on data from the Association of Home Appliance 

Manufacturers (AHAM).2

 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. 

7.1.2 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 and retailers, 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 Markups 

DOE based the retailer markups for residential cooking products 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 markups using these financial data were: 

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

home appliances. 

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 sales prices vary in proportion to retailer 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 to whom these financial data refer handle multiple commodity lines. 

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

the most accurate available indication of home appliance 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 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 section 7.3, 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 markups described below in section 7.3. 

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

consumer demand for residential home appliances 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 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 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. 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 using the following equation: 

MU = 

CGS RTL / DIST + GMRTL / DIST

= 

CGSRTL / DIST + ( LSCRTL / DIST + NLSCRTL / DIST )

BASE CGSRTL / DIST CGSRTL / DIST

where: 

MUBASE = Baseline retailer markup, 

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

GMRTL/DIST = Retailer’s gross margin, 

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. 

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

NLSCRTL/DIST = Retailer’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 

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 using the following equation: 

CGSRTL / DIST + NLSCRTL / DIST MUINCR = 

CGSRTL / DIST

where: 

MUINCR = Incremental retailer markup, 

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

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

7.1.2.3 Overall Markup 

The overall markup is the product of the manufacturer and retailer 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 ×TaxSALES ) = COSTMFG × MUOVERALL _ BASE

where: 

EQPBASE = Consumer equipment price for baseline models, 

COSTMFG = Manufacturer cost for baseline models, 

MUMFG = Manufacturer markup, 

MUBASE = Baseline retailer markup, 

TaxSALES = Sales tax, and 

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

retailer 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 higher7-4 

EERE-2006-STD-0127 COMMENT 64.2
efficiency 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). 

EQPSTD = COSTMFG × MUOVERALL _BASE + ΔCOSTMFG × (MU MFG × MUINCR ×Tax 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 markup, 

TaxSALES = Sales tax, 

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

retailer markup, and sales tax), and 

MUOVERALL_INCR = Incremental overall markup (product of manufacturer markup, 

incremental retailer 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.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 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. 

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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 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.8 

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 7.4.1 below. 

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Table 7.4.1 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 7.4.2 

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.9

 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 nonself-cleaning ovens. 

Table 7.4.2 Average Sales Tax Rates by Product 

Product Tax Rate 

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% 

7.5 SUMMARY OF MARKUPS 

Table 7.5.1 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 7.5.1 Summary of Markups 

Markup Baseline Incremental 

Manufacturer 1.26 

Retailer 1.45 1.15 

Sales Tax 1.069* 

Overall 1.95 1.55 

* 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: 

EQPBASE = COSTMFG × (MU MFG × MU BASE × TaxSALES )

= $120 ×1.26 ×1.45 ×1.069 = $234 

EQPSTD = EQPBASE + ΔCOSTMFG × (MU MFG × MU INCR ×TaxSALES )

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

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REFERENCES 

1 U.S. Department of Energy-Office of Energy Efficiency and Renewable Energy. Technical 

Support Document: Energy Efficiency Program for Consumer Products and Commercial and 

Industrial Equipment: Residential Dishwashers, Dehumidifiers, Cooking Products, and 

Commercial Clothes Washers, September, 2008. Washington, DC. 

<http://www1.eere.energy.gov/buildings/appliance_standards/residential/home_appl_tsd.html> 

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

DC. p. 25. 

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

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

9 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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