Estimating Manufacturing Costs Panel and Open Discussion

Estimating Manufacturing Costs

for Input to GRIM

March 12, 1997

1

 EE-PI-96-001 COMMENT 90

Estimating Manufacturing Costs Panel and Open Discussion 

Estimating Manufacturing Costs 

for Input to GRIM 

March 12, 1997 r 
Estimating Manufacturing Costs Objectives

Manufacturing cost estimates are needed in.three analysis areas:

Life-cycle costs: Manufacturing costs may be used as a basis to

generate consumer life-cycle cost curves. Unless projected prices are

obtained directly, average costs are marked-up to obtain the

consumer price.

Phase 2, Industry cash flow: Average manufacturing costs are needed

to estimate the financial impacts to the industry.

Phase 3, Sub-group analysis: Manufacturing costs are needed for

each sub-group GRIM analysis.

March 12, 1997

2

 EE-PI-96-001 COMMENT 90

Estimating Manufacturing Costs Objectives 

Manufacturing cost estimates are needed in. three analysis areas: 

r:i 

lVJ 

Life-cycle costs: Manufacturing costs may be used as a basis to 

generate consumer life-cycle cost curves. Unless projected prices are 

obtained directly, average costs are marked-up to obtain the . consumer pnce. 

Phase 2, Industry cash flow: Average manufacturing costs are needed 

to estimate the financial impacts to the industry. 

Phase 3, Sub-group analysis: Manufacturing costs are needed for 

each sub-group GRIM analysis. 

March 12, 1997 

2 
Estimating Manufacturing Costs Objectives

For the purposes of the engineering analysis and the industry cash

flow, DOE will consider a range of uncertainty in estimates of average

costs.

20 ,

101

.11

0 --^EOL=

Baseline

Energy Efficiency

i

Data collection methodologies must be consistent with this objective.

March 12, 1997

3

 EE-PI-96-001 COMMENT 90

Estimating Manufacturing Costs Objectives 

For the purposes of the engineering analysis and the industry cash 

flow, DOE will consider a range of uncertainty in estimates of average 

costs. 

20 

...., 

tn 

o 15 o 

Baseline Energy Efficiency 

Data collection methodologies must be consistent with this objective. 

March 12, 1997 

, 3 
Estimating Manufacturing Costs Objectives

For the purposes of the sub-group analysis the cost impacts on

particular types of manufacturers must be quantified.

Sub-group (B)

Sub-group (C)

Average (Industry)

Sub-group (A)

Baseline

Energy Efficiency

March 12, 1997

4

 EE-PI-96-001 COMMENT 90

Estimating Manufacturing Costs Objectives 

For the purposes of the sub-group analysis the cost impacts on 

particular types of manufacturers must be quantified. 

20 

Sub-group (8) ...., '--" 

CJ) Sub-group (C) 0 15 (.) Average (Industry) C) 

c .- Sub-group (A) J.. 

::s 10 

...., 

0 

ctS 

.... 

::s 

c 5 ctS 

:E 

0-

Baseline Energy Efficiency 

March 12, 1997 

4 
Estimating Manufacturing Costs Alternative Approaches

Manufacturing costs can be estimated using various approaches.

Survey Approach

- Obtains manufacturing costs through a process that includes

submission of formal requests to manufacturers, and review of the

data received

44 Cost Modeling Approach

- Derives manufacturing costs by characterizing and modeling the

production line layouts of manufacturing facilities

ASH RAE approach

- Similar to survey approach but not based on design options.

Any or all approaches could be used for a particular rulemaking.

March 12, 1997

5

 EE-PI-96-001 COMMENT 90

Estimating Manufacturing Costs Alternative Approaches 

Manufacturing costs can be estimated using various approaches. 

riA Survey Approach 

Obtains manufacturing costs through a process that includes 

submission of formal requests to manufacturers, and review of the 

data received 

[iA Cost Modeling Approach 

- Derives manufacturing costs by characterizing and modeling the 

production line layouts of manufacturing facilities 

liA ASH RAE approach 

- Similar to survey approach but not based on design options. 

Any or all approaches could be used for a particular rulemaking. 

March 12, 1997 

5 
Estimating Manufacturing Costs Evaluation

Each approach has its areas of application . Evaluation criteria for a

specific application might include:

• Expec et d accuracy of estimates

Time and cost of implementation

• Opportunity for stakeholder involvement

• Treatment of uncertainty in average costs

Treatment of variability between firms

• Validation of results

• Compatibility with GRIM

• Contribution to Non-Model impacts evaluation

- employment

- capital assets

- competitive impacts

March 12, 1997

6

 EE-PI-96-001 COMMENT 90

Estimating Manufacturing Costs Evaluation 

Each approach has its areas of application. Evaluation criteria for a 

specific application might include: 

• 

• 

• 

• 

• 

• 

• 

• 

Expected accuracy of estimates 

Time and cost of implementatjon 

- . 

Opportunity for stakeholder involvement 

Treatment of uncertainty in average costs 

Treatment of variability between firms 

Validation of results 

Compatibility with GRIM 

Contribution to Non-Model impacts evaluation 

- employment 

- capital assets 

- competitive impacts 

March 12, 1997 

6 
GATHERING MANUFACTURER COST DATA

MANUFACURER IMPACT ANALYSES WORKSHOP

MARCH 11 & 12, 1997

ISAAC TURIEL

LAWRENCE BERKELEY NATIONAL LABORATORY

 EE-PI-96-001 COMMENT 90

GATHERING MANUFACTURER COST DATA 

MANUFACURER IMPACT ANALYSES WORKSHOP 

MARCH 11 & 12, 1997 

ISAAC TURIEL 

LAWRENCE BERKELEY NATIONAL LABORATORY 
METHODS FOR COLLECTION OF ENGINEERING COSTS

• Development of Survey Forms Using Iterative Process with

Manufacturers

• Visits to Manufacturing Plants

• Discussions with Suppliers

Literature Review

• Use of Consultants

- Costing

Modeling

- Engineering Issues

 EE-PI-96-001 COMMENT 90

METHODS FOR COLLECTION OF ENGINEERING COSTS 

• Development of Survey Forms Using Iterative Process with 

Manufacturers 

• Visits to Manufacturing Plants 

• Discussions with Suppliers 

• Literature Review 

• Use of Consultants 

- Costing 

- Modeling 

- Engineering Issues 
MANUFACTURER COST-EFFICIENCY DATA -

COSTS 1

!DESIGN IMANUFACTURER'SITECHNICAL FEASIBILITYI RAW LABOR . ! TOOLING I PURCHASED IPACKAGE/ I COSTS I ESTIMATED I

(OPTIONS

1TABLE 1

1 ORDER OF I (Present, Future) I MATERIAL I

I OPTIONS (Not Feasible) I

I

!

PARTS ISHIPPINGI CONFIDENCE EFFICIENCYI

I (± X %) I

l .___. I I I I I I I

I 1 1 1 I I I I I i

1 I i I ( I

I I I I 1 I I ( I I

I I ! I I I I

•1 I I I I I I

1 I I I I I I

I I I I I I I I I I

I I I I !

I I I I I I I I

l 1 I I I^ I I f 1

I

I I I I

I

I

I

I

I I

I I I I I

__

I

__

I I I I

^I I 1 I I I I I I

1 I 1 I

I I I I I I 1 I I I I

I ( I_ I I 1 I I I

1 I

.

I I I I I I I I

I I I I I I I I I

 EE-PI-96-001 COMMENT 90

-.' 

MANUFACTURER COST-EFFICIENCY DATA -

I COSTS 1 

1 I ., 

1 DESIGN IMANUFACTURER'sltECHNICAL FEASIBILITY I RAW : LABOR .1 TOOLING PURCHASED PACKAGE/I COSTS I E'STIMATED 1-

IOPTIONS 1 ORDER OF I (Present, Future) MATERIAL PARTS Sl-tIPPWG I CONFIDENCE I E.FFICIENCYI 

ITABLE 1 1 OPTIONS I (Not Feasible) I (t x %) I 1 

I I I I 1 _I 

I I 1 I 1 

I I I I I l , I 

I I 1 I I I- I 1 

I I 1 I I I I 1 

·1 I I 1 I I I I 

1 1 ! I L I I 1 

I I 1 1 I I I 1 

I I I 1 I I I 

I I I I I I I 

I I I I I I I 

I 1 I I I 1 1 

I 1 I I I I I 

I I r I I 1 I 

i I I 1 I I I 

i I I I 1 I I I 

1 I I I I I I 

I I I I 1 I I 

I I I 1_· _ I I I 

1 I I I I I I 

I I I I 1 I I 

... ~--.- ... 

" 
1998 Design Option Analysis for Refrigerators

Design Option Marketing Utility Unit Cost Impact Incremental Product Cost

[ Desigfl Option Feas. Sm Md L Mat'1 Labor Burden Shi Var. +/-

1. Increased Cabinet

insulation Thickness

(sides, back, bottom)

a. .5 inches

b. L.0 inches

c. 1.5 inches

I

a.

b.

C.

Investment & Expense

Design Option Depreciable Expensed Estimated Energy Savings

Toolin Bld . & Equip. R&D kWh/ r Var. +lIncreased Cabinet Insulation

Thickness (sides, back, &

bottom)

.5 inches

1.0 inches

1.5 inches

Design Feasibility and Marketing Utility Scales: Des. Feas: 0-100%, 100 = Highly Feasible,

NA = Option Used to meet 93 STD.

Mrk. Util: 0-100%, 100 =No Impact

*Note: Utilize Design Option Detail Data. Sheet to estimate option feasibility.

 EE-PI-96-001 COMMENT 90

1998 Design Option Analysis for Refrig1?;rators 

Design Option Marketing Utility Unit Cost Impact Incremental Product Cost 

Design Option Feas. Sm Md Lg Mat'I Labor Burden Shi!! Var. +/. 

1. Increased Cabinet 

Insulation Thickness 

(sides, back, bottom) 

a. .5 inches 

b. l.0 inches 

c. 1.5 inches 

Investment & Expense 

Design Option Depreciable Expensed Estimated Energy Savings 

Tooling Bldg. & Equip. R&D kWblyr 

1. Increased Cabinet Insulation 

Thickness (sides, back, & 

bottom) 

a. .5 inches 

b. 1.0 inches , 

c. 1.5 inches 

Design Feasibility and Marketing Utility Scales: Des. Feas: 0-100%, 100 = Highly Feasible, 

NA = Option Used to meet 93 STD. 

Mrk. Util: 0-100%, 100 = No bnpacl 

*Note: Utilize Design Option Detail Data. Sheet to estimate option feasibility. 

Var. +/-
AMPLE OF USE OF SUPPLIERS

• For Refrigerators, Compressors and Fan Motors are Purchased

Parts

• For Compressors, the Efficiency is a Function of Capacity

• Cost is a Function of Efficiency and Quantity

• Suppliers tote Industry Were Contacted and asked to Supply

Estimates

• Average Values Were Used in the Cost-Efficiency Analyses

• After Industry Review of Data, an Additional Survey of

Compressor Manufacturers was Performed and Data Revised

 EE-PI-96-001 COMMENT 90

EXAMPLE OF USE OF SUPPLIERS 

• For Refrigerators, Compressors and Fan Motors are Purchased 

Parts 

• For Compressors, the Efficiency is a Function of Capacity 

• Cost is a Function of Efficiency and Quantity 

• Suppliers to the Industry Were Contacted and asked to Supply 

Estimates 

• Average Values Were Used in the Cost-Efficiency Analyses 

• After Industry Review of Data, an Additional Survey of 

Compressor Manufacturers was Performed and Data Revised 
AMPLE OF USE OF SUBCONTRACTOR

• Issue was Cost of Induced Draft Versus Natural Draft Gas

Furnace

• Costing Estimators and Consultants Retired from Industry Were

Used

• Cost Data Were Obtained for a Single Design Option through Cost

Modeling

• "Costing Analysis of Design Options for Residential Appliances

and Space Conditioning Equipment," ADM Associates, October,

1986.

 EE-PI-96-001 COMMENT 90

EXAMPLE OF USE OF SUBCONTRACTOR 

• Issue was Cost of Induced Draft Versus Natural Draft Gas 

Furnace 

• . Costing Estimators and Consultants Retired from Industry Were 

Used 

• Cost Data Were Obtained for a Single Design Option through Cost 

Modeling 

• "Costing Analysis of Design Options for Residential Appliances 

and Space Conditioning Equipment," ADM Associates, October, 

1986. 
ISSUES FOR COLLECTION OF ENGINEERING COST DATA

Confidentiality of Cost Data

• Uncertainty in Data from Each Company

• Variability Among Companies

• Average Data for All Companies Aggregates, Uncertainties and

Variability

• Process is Very Time Intensive for Manufacturers and DOE

 EE-PI-96-001 COMMENT 90

ISSUES FOR COLLECTION OF ENGINEERING COST DATA 

• Confidentiality of Cost Data 

• Uncertainty in Data from Each Company 

• Variability Among Companies 

• A verage Data for All Companies Aggregates, Uncertainties and 

Variability 

• Process is Very Time Intensive for Manufacturers and DOE 
Estimating Manufacturing Cost

for Input to the GRIM - Cost

Assessment Approach

Presentation to:

Manufacturer Impact

Analysis Workshop

March 12, 1997

U.S. Department of Energy

Office of Energy Efficiency

and Renewable Energy

1000 Independence Avenue, SW

Washington, DC 20585

 EE-PI-96-001 COMMENT 90

Estimating Manufacturing Cost 

for Input to the GRIM - Co~t 

Assessment Approach 

Presentation to: 

Manufacturer Impact 

Analysis Workshop 

March 12, 1997 

u.s. Department of Energy 

Office of Energy Efficiency 

and Renewable Energy 

1000 Independence Avenue, SW 

Washington, DC 20585 
Manufacturing Cost Estimates for the GRIM

Cost Assessment^Approach

Panel and Open Discussion

March 12, 1997 2

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Panel and Open Discussion 

March 12, 1997 2 
Manufacturing Cost Estimates for the GRIM Objectives

The cost assessment approach for estimating manufacturing costs

has several objectives.

• To provide a consistent cost methodology for generating cost inputs to

GRIM

• To provide manufacturing cost estimates for a "prototypical" state-of-theart manufacturing facility for the Phase 2 " Industry Cash Flow Analysis"

- Characterize uncertainty

• To provide manufacturing cost estimates for sub-groups of manufacturers

for the Phase 3 "Sub-group Analysis"

- Characterize uncertainty

- Characterize variability with the "prototypical " manufacturer

March 12, 1997

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Objectives 

The cost assessment approach for estimating manufacturing costs 

has several objectives. 

• To provide a consistent cost methodology for generating cost inputs to 

GRIM 

• To provide manufacturing cost estimates for a "prototypical" state-of-theart manufacturing facility for the Phase 2 "Industry Cash Flow Analysis" 

- Characterize uncertainty 

• To provide manufacturing cost estimates for sub-groups of manufacturers 

for the Phase 3 "Sub-group Analysis" 

- Characterize uncertainty 

- Characterize variability with the "prototypical" manufacturer 

March 12. 1997 3 
Manufacturing Cost Estimates for the GRIM

Objectives

Cost Assessment approach

Benefits o

Panel and Open Discussion

March 12, 1997 4

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates f9r the GRIM Panel and Open Discussion 

March 12, 1997 4 
Manufacturing Cost Estimates for the GRIM Cost Assessment Approach

The cost assessment approach is similar to the cost modeling

approach used by the Department in 1980 and is based on established

technical cost modeling techniques.

• "Bottoms-up" cost assessment

• Component focused (structured Bill of Materials)

• Activity based

Detailed manufacturing processes

• Spreadsheet model readily permits modification to inputs and structure

• Multiple design variations can be addressed on an add and omit basis

March 12, 1997 5

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Cost Assessment Approach 

The cost assessment approach is similar to the cost modeling 

approach used by the Department in 1980 and is based on established 

technical cost modeling techniques. 

• "Bottoms-up" cost assessment 

• Component focused (structured Bill of Materials) 

• Activity based 

•. Detailed manufacturing processes 

• Spreadsheet model readily permits modification to inputs and structure 

• Multiple design variations can be addressed on an add and omit basis 

March 12, 1997 5 
Manufacturing Cost Estimates for the GRIM Cost Assessment Approach

The first step involves creating a bill of materials for the specific

design under review.

Bill of

Materials

Raw

Materials

NoPurchased Parts

Fabrication

Processes

Finished

Materials

Assembly

Processes

The bill of materials is a list of all relevant parts with dimensions, raw

material costs, scrap rates, product forms, and purchased part costs.

March 12, 1997 6

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Cost Assessment Approach 

The first step involves creating a bill of materials for the specific 

design under review. 

Raw Fabrication Finished 

Materials Materials 

-.... Processes -- Bill of Assembly 

Materials Purchased Parts Processes --

The bill of materials is a list of all relevant parts with dimensions, raw 

material costs, scrap rates, product forms, and purchased part costs. 

March 12, 1997 6 
Manufacturing Cost Estimates for the GRIM Cost Assessment Approach

The bill of materials is expanded to identify major subassemblies and

incorporate the fabrication and assembly processes.

Final Assembly Final functional testsampling

Final Inspection

Painting

Attach additional

components

Other Connections

Overall Structure Subassembly 2

Subassembly 1

Subassembly 4

Subassembly 3

Auxilary

Components

Subassembly 5

Heat Treating

March 12, 1997 7

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Cost Assessment Approach 

The bill of materials is expanded to identify major subassemblies and 

incorporate the fabrication and assembly processes. 

Final functional test- I Final Assembly I 

I sampling 

I Final Inspection I 

I Painting I 

Attach additional I I components Heat Treating 

I Other Connections 

I Overall Structure I I Subassembly 2 I I Subassembly 4 I Auxilary 

Components 

I Subassembly 1 I I Subassembly 3 I I Subassembly 5 I 

{f 

March 12, 1997 7 
Manufacturing Cost Estimates for the GRIM Cost Assessment Approach

From the expanded bill of materials the direct material and labor costs

are estimated.

Assembly

Subassembly 1

Subassembly 2

Subassembly 3

Subassembly 4

Subassembly 5

Subassembly 6

Subassembly 7

Parts

Materials Direct Labor

Weight Cost Hours Cost

March 12, 1997 8

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Cost Assessment Approach 

From the expanded bill of materials the direct material and labor costs 

are estimated. 

Materials Direct Labor 

Assembly Parts Weight Cost Hours Cost 

Subassembly 1 

Subassembly 2 

Subassembly 3 

Subassembly 4 

Subassembly 5 

Subassembly 6 

Subassembly 7 

March 12, 1997 8 
Manufacturing Cost Estimates for the GRIM Cost Assessment Approach

The benchmark manufacturing cost methodology of the cost

assessment approach establishes consistency for further review and

discussion

• The manufacturing cost estimates are representative of modern

manufacturing methods and state-of-the-art designs

• Assumes a "greenfield" site for equipment and building costs

• Manufacturing cost inputs and calculations are transparent for discussion

with all stakeholders

• Cost model outputs provide baseline inputs to the GRIM

• The cost model creates a standard case for discussion on the areas and

levels of difference in manufacturing costs

March 12, 1997 9

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Cost Assessment Approach 

The benchmark manufacturing cost methodology of the cost 

assessment approach establishes consistency for further review and 

discussion 

• The manufacturing cost estimates are representative of modern 

manufacturing methods and state-of-the-art designs 

• Assumes a "greenfield" site for equipment and building costs 

• Manufacturing cost inputs and calculations are transparent for discussion 

with all stakeholders 

• Cost model outputs provide baseline inputs to the GRIM 

• The cost model creates a standard case for discussion on the areas and 

levels of difference in manufacturing costs 

March 12, 1997 9 
Manufacturing Cost Estimates for the GRIM Cost Assessment Approach

The cost assessment approach is very effective in comparing

competing design approaches or processes because its structure is

independent of the product or process.

Product Specifications

Part Weight

Production Volume

Materials Database

Zirconia

Calcia

Cost Dens.... Operation #1

Process Database

Ball Milling

CVD/EVD

Sintering

Cost Rate....

Financial Factors

Hours per day

Days per Year

Wages

ROI....

Materials

# laborers

Equip Cost

Utilities

Tooling

Building Space

. f2

ce

'Pe

Cost Summary

Materials

Labor

Utilities

Equipment

Tooling

Maintenance

Indirect Labor

Building Space

Cost of Capital

GRIM

March 12, 1997 10

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Cost Assessment Approach 

The cost assessment approach is very effective in comparing 

competing design approaches or processes because its structure is 

independent of the product or process. 

Product Specifications 

Part Weight 

Production Volume 

Materials Database 

Zirconia 

Calcia 

Cost Dens .... 

Process Database 

Ball Milling 

CVD/EVD 

Sintering 

Cost Rate .... 

Financial Factors 

Hours per day 

Days per Year 

Wages 

RO!. ... 

Operation #1 

Materials 

# laborers 

Equip Cost 

Utilities 

Tooling 

Building Space 

Cost Summary 

I 2 Materials 

3 .. Labor 

Utilities 

Equipment 

Tooling 

Maintenance 

Indirect Labor 

ce Building Space 

Cost of Capital 

March 12, 1997 10 
Manufacturing Cost Estimates for the GRIM

1 Objectives

E Cost Assessment Approach

Phase 2 Analysis-Uncertainty

Phase 3 Analysis-----Variability

Benefits o the Approach

Panel and Open Discussion

-T-11%111W

March 12, 1997 11

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Panel and Open Discussion 

March 12, 1997 11 
Manufacturing Cost Estimates for the GRIM Phase 2 Analysis-Uncertainty

In modeling the "prototypical " manufacturing facility uncertainty will

be considered relative to key input variables.

® Labor rates

Material costs

Purchased part prices

• Manufacturing equipment and tooling prices

• Production Volume

March 12, 1997 12

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Phase 2 Analysis-Uncertainty 

In modeling the "prototypical" manufacturing facility uncertainty will 

be considered relative to key input variables. 

• Labor rates 

• Material costs 

• Purchased part prices 

• Manufacturing equipment and tooling prices 

• Production Volume 

March 12, 1997 12 
Manufacturing Cost Estimates for the GRIM Phase 2 Analysis-Uncertainty

Uncertainty in costs can be estimated through sensitivity analysis and

simulation.

Cost vs Production Volume

4406 Case (1996)

10,000 Trials

.039 -

.0

.000

Forecast: Total System cost per kW

Frequency Chart 160 Outliers

389

...:....................

.......................F 291

fo

...................... 194 .C

C

CD

..... ............... 97.2

0

$500.00 $800.00 $1,100.00 $1,400.00 $1,700.00

March 12, 1997 13

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Phase 2 Analysis-Uncertainty 

Uncertainty in costs can be estimated through sensitivity analysis and 

simulation. 

$40.00 

$30.00 

J $25.~ 

l $20.00 

~ $15.00 

Cost vs Production Volume 

4406 Case (1996) 

Annual Production VoWIM (thoUtindl) .0100 

Forecast: Total System cost per kW 

10,000 Trials Frequency Chart 160 Outliers 

.039 389 

.029 ••••••••••••••••••••••••• 

~ 

,Q .019 ~ 

,Q 

Q d: .Q10 

~ .. ~ .... -....... -...... . 

.000 .L..,.-r-dliJ.dll1llUl.l.lJ, 

$500.00 $800.00 $1,100.00 

•••••••••••••••••••••• 291 

." 

c:; 194 .c 

c: 

('1) 

::I 

97.2 ~ 

IlllllllJlll!llwd.liw.,..L 0 

$1,400.00 $1,700.00 

March 12, 1997 13 
Manufacturing Cost Estimates for the GRIM

Objectives

Cost Assessment. Approach

77 17

Phaso 2 Analysis-Uncertainty

Panel and Open Discussion

Phase 3 Analysis-"Variability

I enefits of the Approach

March 12, 1997 14

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Panel and Open Discussion 

March 12, 1997 14 
Manufacturing Cost Estimates for the GRIM Phase 3 Analysis-Variability

Variability in manufacturing costs between manufacturer sub-groups

may stem from differing design concepts and manufacturing methods.

• Design

- Bill of materials

Material and process selectionManufacturing

- Production volume

- Automation levels

- Production. layout

- Product mix

March 12, 1997 15

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Phase 3 Analysis-Variability 

Variability in manufacturing costs between manufacturer sub-groups 

may stem from differing design concepts and manufacturing methods. 

• Design 

- Bill of materials 

- Material and process selection' 

• Manufacturing 

- Production volume 

- Automation levels 

- Production· layout 

- Product mix 

March 12, 1997 15 
Manufacturing Cost Estimates for the GRIM Phase 3 Analysis-Variability

Variability in manufacturing costs can be better understood through

separate models for each firm or subgroup.

Manufacturing Cost Breakdown by Industry Subgroups

q Other Costs

n Cost of Capital

q Equipment and Building Cost

q Tooling Cost

® Labor Cost

q Net Material Cost

Firm A Firm B Firm C Firm D Firm E Firm F

March 12, 1997 16

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Phase 3 Ana/ysis-Variability 

Variability in manufacturing costs can be better understood through 

separate models for each firm or subgroup. 

Manufacturing Cost Breakdown by Industry Subgroups 

$9.00 ,----------------------------. 

$8.00 

$7.00 

$6.00 

~ £ $5.00 

~ Co 

'1ii $4.00 

<3 

$3.00 

$2.00 

$1.00 

$0.00 

FirmA Firm B FirmC Firm D 

• Cost of Capital 

I]] Equipment and Building Cost 

o Tooling Cost 

• Labor Cost 

11 Net Material Cost 

Firm E Firm F 

March 12, 1997 16 
Manufacturing Cost Estimates for the GRIM

Ob ectives.

Cost Assles-srneiit Approach

Phase 2 Analysis-Uncertainty

Phase 3 AnalysisVariability

Benefits of the Approach

Panel and Open Discussion

March 12, 1997 17

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Panel and Open Discussion 

March 12, 1997 17 
Manufacturing Cost Estimates for the GRIM Benefits of the Approach

The cost assessment approach has several benefits.

It establishes consistency in cost definitions and estimation techniques

® It estimates uncertainty in achieving energy efficiency gains for a

"prototypical " manufacturing facility

® It provides "benchmark" for explaining variability between firms

March 12, 1997 18

 EE-PI-96-001 COMMENT 90

Manufacturing Cost Estimates for the GRIM Benefits of the Approach 

The cost assessment approach has several benefits. 

• It establishes consistency in cost definitions and estimation techniques 

• It estimates uncertainty in achieving energy efficiency gains for a 

"prototypical" manufacturing facility 

• It provides "benchmark" for explaining variability between firms 

March 12, 1997 18 
 EE-PI-96-001 COMMENT 90
 EE-PI-96-001 COMMENT 90

ave 

• Re 

• 

Inc 

• Rei 
 EE-PI-96-001 COMMENT 90

s········ 

• Fir 

ind 

.Ma 

pro 

• PN 

ene 

• 

1m 

e Fin 
Cost Versus Efficiency Curves

Alternate Approach For Engineering

& Manufacturers Impact Analyses

ARI 03/07/97 1

 EE-PI-96-001 COMMENT 90

ARI 

Cost Versus Efficiency Curves 

Alternate Approach For Engineering 

& Manufacturers Il11pact Analyses 

03/07/97 1 
Engineering Analysis

Systems Approach Versus Design Options

Design Options Approach Assumes All.

Manufacturers Use Same Design Options To

Achieve Certain Efficiency - Too Prescriptive

<< _ A/C Manufacturers Use Proprietary Trade Secrets

To Increase Efficiency On A System Basis

ARI 03/07/97

 EE-PI-96-001 COMMENT 90

ARI 

Engineering Analysis 

~ Systems Approach Versus Design Options 

.~ Design Options Approach Assumes All. 

Manufacturers Use Same Design Options To 

Achieve Certain Efficiency - Too Prescriptive 

lW Ale Manufacturers Use Proprietary Trade Secrets 

To Increase Efficiency On A System Basis 

03/07/97 2 
Manufacturers Impact

zlmqmli^1-71,1177T 7111-; 711-:77-71- IN

Manufacturers Determine Cost To Achieve Higher

Efficiency Relative To Baseline standard

'g Establish Criteria For Manufacturers To Consider

In Determining Relative Cost

Qualitative Assessment Still Necessary After

Review Of Results

ARI 03/07/97 3

 EE-PI-96-001 COMMENT 90

ARI 

Manufacturers Impact 

~ Manufacturers Determine Cost To Achieve Higher 

Efficiency Relative To Baseline Standard 

~ Establish Criteria For Manufacturers To Consider 

In Determining Relative Cost 

l\i!J Qualitative Assessment Still Necessary After 

Review Of Results 

03/07/97 3 
Cost Versus Efficiency Curve

Aggregate Manufacturer's Data By Regression

Analysis To Produce Average Industry Curve

FE0 Statistically Adjust Curve To Profile Portion Of

Industry

Used Percentile Curve For ASHRAE, To Protect

Small Manufacturers

® Data From Curve Used For LCC

AR I 03/07/97 4

 EE-PI-96-001 COMMENT 90

ARI 

Cost Versus Efficiency Curve 

~ Aggregate Manufacturer's Data By Regression 

Analysis To Produce Average Industry Curve 

~ Statistically Adjust Curve To Profile Portion Of 

Industry 

l~l Used 90 Percentile Curve For ASHRAE, To Protect 

Small Manufacturers 

l1il Data From Curve Used For LCC 

03/07/97 4 
Example Cost Versus Efficiency

Curve

Efficiency vs. Relative Cost

Ground Wate r He at Pump (ARI-325)

( 30 K Btu/H)

LU

W

14.5

14.0

13.5

13.0

12.5

12.0

71

11.0

10.5

10.0

1.00 1.10

0

74

1.20

®-

,IF

,I

n

1.30

dvm

1.40

to 0 ve C

1.50 1.60

Relative Cost Per Unit

-1.70 1.80 1.90

ARI 03/07/97 5

 EE-PI-96-001 COMMENT 90

ARI 

Example Cost Versus Efficiency 

Curve 

14.5 

14.0 

13.5 

13.0 

a: 12.5 

UJ v/ 

UJ 12.0 .- / 

/ 

11.5 / 

/ , 

II' 

/ 

11.0 

10.5 

10.0 

1.00 LiO 

) 

4 , 

Efficiency vs. Relative Cost 

G.round Wate r He at Pump (ARI-325) 

(30 K Btu/H) 

.1- ............. ....... 

.... ...... •• 

II 

o. 

IJ ~,~ 

1.20 1.30 lAO 1.50 1.60 1.70 

R e la tive Cos t Per Unit 

03/07/97 

1.80 1.90 

5 
Price Forecasts Panel and Open Discussion

Manufacturing Price Forecasts

for Input to GRIM

March 12, 1997

1

 EE-PI-96-001 COMMENT 90

Price Forecasts Panel and Open Discussion 

Manufacturing Price Forecasts 

for Input to GRIM 

March 12, 1997 

1 
Price Forecasts Objectives

The GRIM requires externally supplied price forecasts for a base case

(without standards) and for several different standards efficiency

levels.

Price forecasts are needed for both Phase 2, Industry Cash Flow and

Phase 3, Sub-group Analysis

Previously supplied by MIM Model

Markup over variable. costs

Controversial issue of cost pass-through of standards-induced costs

to consumers

- Consumer life-cycle cost curve and manufacturer profitability linked

March 12, 1997

2

 EE-PI-96-001 COMMENT 90

Price Forecasts Objectives 

The GRIM requires externally supplied price forecasts for a base case 

(without standards) and for several different standards efficiency 

levels. 

rlJ····, : I 

;, .. ) 

Price forecasts are needed for both Phase 2, Industry Cash Flow and 

Phase 3, Sub-group Analysis . 

Previously supplied by MIM Model 

'- Markup over variable costs 

Controversial issue of cost pass-through of standards-induced costs 

to consumers 

- Consumer life-cycle cost curve and manufacturer profitability linked 

March 12, 1997 

2 
Price Forecasts Alternative Approaches

The Department is committed to developing price estimates by

drawing on multiple sources.

Survey data approach

- Market survey to gather price data on existing products.

- Manufacturer survey to estimate increases in retail prices (March

1982 TSD)

Markup pricing approach - DOT Methodology

- Applies a per-unit non -variable cost and profit markup over per-unit

variable cost to obtain the manufacturer price . Adding a dealer

markup to this would give the retail price.

Economic markup approach

- Uses economic parameters to arrive at the manufacturer price.

March 12, 1997

3

 EE-PI-96-001 COMMENT 90

Price Forecasts Alternative Approaches 

The Department is committed to developing price estimates by 

drawing on multiple sources. 

Survey data approach 

- Market survey to gather price data on existing products. 

- Manufacturer survey to estimate increases in retail prices (March 

1982 TSD) 

Markup pricing approach - DOT Methodology 

- Applies a per-unit non-variable cost and profit markup over per-unit 

variable cost to obtain the manufacturer price. Adding a dealer 

markup to this would give the retail price. 

Economic markup approach 

- Uses economic parameters to arrive at the manufacturer price. 

March 12, 1997 

3 
Price Forecasts Scenario Analyses

While no single approach is entirely reliable, each may contribute to

bounding the range of possible prices.

Market survey data approach

- Existing products

Markup pricing approach - DOT Methodology

- Historical experience

Economic markup approach

- Impact of price increases

Expert Judgment / Surveys

- Market experience

Through scenario analysis, various assumptions about cost passthrough can reflected.

March 12, 1997

4

 EE-PI-96-001 COMMENT 90

Price Forecasts Scenario Analyses 

While no single approach is entirely reliable, each may contribute to 

bounding the range of possible prices. 

l.-/J Market survey data approach 

- Existing products 

l.,!J Markup pricing approach - DOT Methodology 

- Historical experience 

l./J Economic markup approach 

- Impact of price increases 

lJJ Expert Judgment / Surveys 

- Market experience 

Through scenario analysis, various assumptions about cost passthrough can be reflected. 

March 12, 1997 

4 
Price Forecasts Market Survey

Market survey data can be most appropriately used to predict prices

for existing products that are already produced in large quantities.

Electronic ballast prices obtained from Lighting Research Institute

Market Survey

vi Baseline model prices for refrigerators obtained from the ELCAP

refrigerator retail price data base

However this approach is not universally applicable

- Products not in market, or in low quantities

- Efficiency features bundled with non-efficiency features

- Available data is limited

- Standards may commoditize features and thus alter pricing

March 12, 1997

5

 EE-PI-96-001 COMMENT 90

Price Forecasts Market Survey 

Market survey data can be most appropriately used to predict prices 

for existing products that are already produced in large quantities. 

[i/J Electronic ballast prices obtained from Lighting Research Institute 

Market Survey 

li/J Baseline model prices for refrigerators obtained from the ELCAP 

refrigerator retail price data base 

[./1 However this approach is not universally applicable 

- Products not in market, or in low quantities 

- Efficiency features bundled with non-efficiency features 

- Available data is limited 

- Standards may commoditize features and thus alter pricing 

March 12, 1997 

5 
Price Forecasts Expert Judgment / Surveys

A 1 980 survey of consumer product manufacturers provides an

illustration of possible questions that could provide DOE with insight

as to industry market pricing policies, past and future sales and the

impact of standards on these items. Factors influencing consumer

purchases are:

Target markets

Distribution chains

i Export / Import sales

Marketing strategies

Firm price sensitivity

Industry price sensitivity

Cost pass-through

,V! Substitute products

 EE-PI-96-001 COMMENT 90

Price Forecasts Expert Judgment / Surveys 

A 1980 survey of consumer product manufacturers provides an 

illustration of possible questions that could provide DOE with insight 

as to industry market pricing policies, past and future sales and the 

impact of standards on these items. Factors influencing consumer 

purchases are: 

[~ Target markets 

!-./J Distribution chains 

[~ Export / Import sales 

r~ Marketing strategies 

lJJ Firm price sensitivity 

[4/J I ndustry price sensitivity 

[~ Cost pass-through 

,.) Substitute products 

March 12, 1997 

6 
SURVEY Oy' CONSUMICn PRODUCT MANUFACTURERS

REPOR 'IINCI FORM r#IIA

Effect of a Minimum Efficiency Level Higher than the Manufacturer Perceived

Maximum Technologically Feasible and Economically Justifiable Level

(1) COMPANY CODE NOi_,_,, Return tot GAS APPLIANCE MANUFACTURERS ASSOCIATION

( 2) PRODUCT TYPEt KITCHEN RANGES AND OVE14S 1901 North Fort Myer Drive

Arlington, Virginia 22209

(3) PRODUCT CLASSt

(Enter one class only) DUE DATEt August 15, 1979

(4) DOE Sample Efficiency Leveler 1. EF 2. EF 3. EF

5 6 7 8 9 t0 11 12 13

Basic Model

Energy

Factor

from

Co!, 6

Form II

Higher DOE

Sample

Efficiency

Level (EF)

Design

Option

Required

Earliest

Production

Date '

(month,

ear

Estimated

Increase

` In Retail

Price

Estimated 1985

Domestic Shipments at this

Sample EF

(I,0009

Investment

Required

-

Estimated Energy

Factor Resulting

from Design

Option Utilized

FT

 EE-PI-96-001 COMMENT 90

. 

!!,J(1 .• ~· :.':.; ''''.,~, ' • ,I ... ;l.s:.~.~~...,.(.~ .",'ltI''A',',', .• :',<. • ~'.. , •• " ........ , ...... .,10 .,> .. c .. ~.~y." ",a':',.:. 

sun vmy or CONSUMIGR PRODUC'I' MANUlrAC'nIlH!;IH~ 

REl'ORTlNO EORM IIIIA 

mUect of a Minimum Elflclency Lovel Higher Utan the t .. ·fftnufncturor Porcolved 

Maximum 'J'echnologlcally Feulble and Economically Justiflablo !Alvel 

{I' COMPANY CODE NOI ___ . __ 

(Z) PRODUCT TYPE, -.!9.!.£!IEN RANOES AND OVEJ~ 

(3) PRODUCT CLASS. _~:--__ ~_~-:-__ _ 

Relurn tOI GAS APPLIANCE MANU· 

FAC'fUltEHS ASSOCJ~'I'lON 

1901 No/·th Fort Mvor Drive 

Arlington, Virginia ZZZOq 

(Enter one cia .. only) DU m DA TE, _.......;.A.;.;;U;;qB,.;;,UIl ... t~I;.;:;5 .... , ...;;1,",,2~72,--___ _ 

(~) DOE Sample Ertlelency ~veht t. ___ Ell' 2 .. ___ EF 3. ____ EF 

5 (, 1 8 9 10 11 lZ 13 

Enorgy Higher DOE Design Earlleet Estimated Estimated 1985 Inveslme.nt ElIlImnled Energy 

Basle Model Factor Sample . Option Productlon Increase Domen tic Shlp- Required Factor Resulting 

from Efficiency Required Date . 'In Retail ments at this from Oeslgn 

Col. 6 Level (EF) (month, Price Sample EF OpU on Uti H zed 

Form II , year) (I,OOOs} 

.. " 

, -

, 

. 

I 

• 
7. Cr, a 7ro uc Class basis , -ease res-o nd -zc the =.._i0 d.nc

cuestions on rice sens___:_.y. :

answers, hold such no. -price fa==__s_ as ser_ce, installation,

reliability or availability ceps tan. 'hen reconsider

answers

factors

all oth

your

to (a) (c) by allow-i nc the most important non-price

(identified by you) =o change one at a time while holding

r factors constant.

(a) What % increase was your last general -rice rise?

Was'the-price "increase -.-

• more than your competitors? ( )

Less than you-- competitors? ( )

About the same as your compe-..itors? ( )

(b) What was the effect on sales of =rice increase?

• Sales rose by

• Sales fell by

(c) If both- you and your competitors raised price by 10%, what

would you expect to happen to the dollar value of -your sales?

• Increase by

• Decrease by

• Stay the same ( )

(d) If your costs of production rose by 10%, what percentage

of those costs could you pass on to your customers without

reducing sales by more than 1%, 5%, 10%?

(e) Please estimate what fraction of your major customers* would

probably substitute other products ( i.e., fans for air conditioners) for yours if your prices were increased by the follow-

.;.ng increments :

5s 5-10% 10-15% ? 15%

* Define what constitutes a major customer (e.g., builders and retail

distributors.)

356

 EE-PI-96-001 COMMENT 90

I _ 

~laase 

ques::.iO:1S 0:: -::-:-ice se:1si ~i .... -~::.y _ 

rel~abili~v or availab~li~y cc~st~~. 'Z:len reconsider Y0tl!" 

=ac~ors (identified by you) ::.0 c~~ge one a~ a time while holein~ 

all other !ac~ors cons~~. 

(a) ~~at ~ incr~ase wasyc~ :as~ g~~~al price :ise? 

• Me:-e 't..i.a.!-J yo~ COD:,?eti tors? () 

•. :Less" Ulan your ccn:pe~tOrs? <'} 

. •. Al:>oi:~ tile SaIn~ as you:- COl:lpe-::.i tors? 

(b) What was the ef:ec~on sales 0: ~~s p:-ice increase? 

• Sales rose by ------~ • Sales fell by \ ------- (c) "1: bo~h- you!!!.!! you: competitors raised price by 10\, wha~ 

would you expec~ to happen to til~ dollar value of -your sales? 

• Increase by ---_\ 

• Decrease by , ----- § S~ay the same ( ) 

(d) If your cos~s 0: production rose by 10~, what percer.~ge 

of -:.hose cos-:s could you pass 01:: to your customers .01. ~out 

reaucing sales by more than 1\, 5\, 10~? 

(e) Please estimate wha~ fraction 0: you: major c:ustoJners* would 

probably substi~u~e ot:.~er products (i.e., fans for air condit.ioners) for yours if your prices were increased by Ule follo ... '-

ing increments: 

5-10\ 10-15\ > 15\ 

Define what constit.utes a majC"r customer (-e.g., builders and retail 

distributors. ) 

356 
44

.A

4)

19bUav

\ \ \

0 0 0

0

N

\

►-1 rO

41

\

u!1

Ail

°

a 'U

 EE-PI-96-001 COMMENT 90

tile level w::u..Q pri::es can be set. E'or instance, if demanc. 

grO'to.'"til (:ta-.-ke-:: -:vt:a::teristic) in -:he industry has been low 

(level). i": i.s m::.!.ikely. all otiler -:...--u.ngs being equal, that 

pri::es ::oul.::: inc=eass app=eci c .... 1:: (sales recorc (data) ::-equi.red). 

?a5't cese::vG.".:.i.o .... c:, :.l.sC't!Ss b:>,,' in ma:ke<; 

cnarac-cerutics c= have a::fe::ted your company' S abili ty 

":0 ?ass o=. ccs":s as ,?!:'i.CE i:l::=eases 'CO consumer. Indica te 

these price increases whicn 

:Iligh't o::::t:= :i.: ef:icie..'"l:::Y =egulations prove to be costly 

to 2!l all 0: your answers use quantitative data 

.. Demand 

• Significan:e 0: priCE as 

a bas:is fo= tion 

• 

• ?oreic;n t:i..cm 

e !f..arket sha..."'"e 

distribution 

• Fo=ecas.U!C capac:::. ty 

utilizatia:: 

Data Recruired Level 

. 

=ecords high/low 

high/low 

price high/low 

elasticities 

market share high/low 

data 

industry dispersed/ 

sa1es .. concentrated 

Sales high/low 

auction capacity 
DOT Methodology for March 12,1997 U.S. Department of Energy

Office of Energy Efficiency

Estimating Manufactu rer and Renewable Energy

1000 Independence Avenue, SW Markups Washington, DC 20585

 EE-PI-96-001 COMMENT 90

DOT Methodology for 

Estimating Manufacturer 

Markups 

March 12, 1997 U.S. Department of Energy 

Office of Energy Efficiency 

and Renewable Energy 

1000 Independence Avenue, SW 

Washington, DC 20585 
DOT Methodology Background

The National H ighway Transportation and Safety Administration

(NH SA) at the Department of Transportation (DOT) has been actively

involved in developing a methodology for estimating the costs of

implementing Federal motor vehicle standards.

NHTSA uses benefit-cost analyses as a tool to help it reach

decisions on implementing new standards and to evaluate the merits

of existing standards.

NHTSA cost estimates represent the average per vehicle retail price

change to the new car buyer for the implementation of new

standards.

:March 12, 1997

1

 EE-PI-96-001 COMMENT 90

DOT Methodology Background 

The National Highway Transportation and Safety Administration 

(NHTSA) at the Department of Transportation (DOT) has been actively 

involved in developing a methodology for estimating the costs of 

implementing Federal motor vehicle standards. 

ri/J NHTSA uses benefit-cost analyses as a tool to help· it reach 

decisions on implementing new standards and to evaluate the merits 

of existing standards. 

'Ii/J NHTSA cost estimates represent the average per vehicle retail price 

change to the new car buyer for the implementation of new 

standards. 

:March 12, 1997 
DOT Methodology Introduction

NHTSA segments the retail price of a car into the following elements:

?fr Variable costs

Non-variable costs

Manufacturer Profit

Dealer Markup

These are obtained using a "Process Cost

Estimation Methodology" .

(optional- Contractor expertise is used.)

These two quantities are historical values

derived from vertical analyses of 10-K

reports filed with the Securities and

Exchange commission (SEC).

These are obtained from recent price

manuals.

:March 12, 1997

2

 EE-PI-96-001 COMMENT 90

DOT Methodology Introduction 

NHTSA.segments the retail price of a car into the following elements: 

i;t Variable costs 

* Non-variable costs 

~ ~ Manufacturer Profit 

. 

A. Dealer Markup ~ 

Note: Dealer markup is not relevant for our discussion of the manufacturer's price. 

:March 12, 1997 

2 
DOT Methodology Variable costs

The variable costs for manufacturing a car are arrived at using a

"Process Cost Estimation Methodology".

Description

,X

Variable costs Non-variable costs

and profit markup

Process Cost Estimation

Methodology

The following steps are involved:

(1) Identification of all feasible design

options

manufacturers most likely will employ

(2) Identification of design concepts

(3) Selection of specific concepts for

costing

(4) Development of cost estimates:

• direct material costs

• direct labor costs

• variable burden costs

:March 12, 1997

3

 EE-PI-96-001 COMMENT 90

DOT Methodology Variable costs 

The variable costs for manufacturing a car are arrived at using a 

"Process Cost Estimation Methodology". 

, 

Description t 

Process Cost Estimation 

Methodology 

The following steps are involved: 

(1) Identification of all feasible design 

options . 

(2) Identification of design concepts 

manufacturers most likely will employ 

(3) Selection of specific concepts for 

costing 

(4) Development of cost estimates: 

• direct material costs 

• direct labor costs 

• variable burden costs 

:March 12. 1997 

i 

3 
DOT Methodology Non-variable costs and Profit

NHTSA uses manufacturer's historical long-term average nonvariable and profit markup rates, obtained from SEC 10-K reports, in

estimating the manufacturer markups.

Manufacturer Price Common Sizing Of 10-K'S

Common sizing involves identifying:

(1)

Variable costs Non-variable costs

and profit markup

Vertical analysis of the 10-K reports

filed with the SEC

Net sales

(2) Fixed and discretionary costs:

• Maintenance and repairs

• Research and development

• Selling, general and administration

• Taxes other than income

• Pension expense

• Depreciation

• Amortization, tooling

• Provisions for plant closing

• Amortization, intangibles

(3) Income from continuing operations

Variable manufacturing costs = (1)-(2)-(3)

:March 12, 1997

4

 EE-PI-96-001 COMMENT 90

DOT Methodology Non-variable costs and Profit 

NHTSA uses manufacturer's historical long-term average nonvariable and profit markup rates, obtained from SEC 10-K reports, in 

estimating the manufacturer markups. 

Vertical analysis of the 10-K reports 

filed with the SEC 

Common Sizing Of 10-K'S ,: 

Common sizing involves identifying: 

(1) Net sales 

(2) Fixed and discretionary costs: 

• Maintenance and repairs 

• Research and development 

• Selling, general and administration 

• Taxes other than income 

• Pension expense 

• Depreciation 

• Amortization, tooling 

• Provisions for plant closing 

• Amortization, intangibles 

(3) Income from continuing operations 

Variable manufacturing costs = (1 )-(2)-(3) 

:March 12, 1997 

4 

" '. 
DOT Methodology Markup calculation

After common-sizing the manufacturer's 10-K reports, the final step

involves calculating the manufacturer markup.

® Manufacturer markup is applied over the variable manufacturing costs to

estimate the manufacturer price. The manufacturer markup represents

the non-variable and profit markup.

Net Sales

Non-variable + profit markup

Variable manufacturing costs

:March 12, 1997

5

 EE-PI-96-001 COMMENT 90

DOT Methodology Markup- calculation 

After common-sizing the manufacturer's 10-K reports, the final step 

involves calculating the manufacturer markup. 

• Manufacturer markup is applied over the variable manufacturing costs to 

estimate the manufacturer price. The manufacturer markup represents 

the non-variable and profit markup. 

Net Sales 

Non-variable + profit markup = 

Variable manufacturing costs 

:March 12, 1997 

5 
DOT Methodology Common-sizing

The table presented below shows the common -sizing approach

applied to the 10-K financial reports of an appliance manufacturer:

Appliance 1 994-1 995

(thousands of $)

Net sales $ 9399,093.0 100.0

Variable Manufacturing Costs: 6,694,548.0 71.2

Contribution Margin $ 2,704,545.0 28.8 %

Fixed & Discretionary Costs:

Maintenance & Repairs $ 0.0 0.0 %

Research & Development $ 0.0 0.0 %

Selling , General & Admin . $ 1,569,590. 0 16.7 %

Taxes Other Than Income $ 0.0 0.0 %

Pension Expense $ 0.0 0.0 %

Depreciation $ 315,075.0 3.4 %

Amortization, Tooling $ 0.0 0.0 %

Amortization , Intangibles $ 0.0 0.0 %

SUBTOTAL $1,884, 6651O 20.1 %

Income from Cont. U erations $ 819,88010 8.7%

Other Revenues and Gains $17,032.0 0.2 %

(Other Expenses and Losses ) ($ 244,373.) -2.6 %

Income before Interest, Taxes, Extr. Items $ 592, 539.0 6.3 %

Interest Income (Expense) - Net ($ 201 , 528.0) -2.1 %

Income before Taxes and Extr. Items $ 391 , 011.0 4.2 %

Provision for Income Taxes $ 203,600.0 2.2 %

Income after Income Taxes $ 187,411.0 2.0%

Earnings in Affiliates - Net $ 0.0 0.0 %

Earnings before Extr. Items $ 187,411.0 2.6%

Extraordinary Items - Net ($ 5,480.) -0.1 %

Other ($3,190.) -0.0 %

Net Income $ 178,741.0 2.8 %

Non variable & _ 100

Profit Markup 71.2

= 1.41

:March 12, 1997

6

 EE-PI-96-001 COMMENT 90

DOT Methodology Common-sizing 

The table presented below shows the common-sizing approach 

applied to the 1 O-K financial reports of an .appliance manufacturer: 

Fixed & Discretionary Costs: 

Maintenance & Repairs 

Research & Development 

Selling, General & Admin. 

Taxes Other Than Income 

Pension Expense 

Depreciation 

Amortization, Tooling 

Amortization ibles 

Other Revenues and Gains 

(Other Expenses and Losses) 

Income before Interest, Taxes, Extr. Items 

Interest Income (Expense) - Net 

Income before Taxes and Extr. Items 

Provision for Income Taxes 

Income after Income Taxes 

Earnings in Affiliates - Net 

Earnings before Extr. Items 

Extraordinary Items - Net 

Other 

$0.0 

$ 0.0 

$ 1,569,590.0 

$ 0.0 

$0.0 

$ 315,075.0 

$ 0.0 

0.0 

$ 17,032.0 

($ 244,373.) 

$ 592,539.0 

($ 201,528.0) 

$ 391,011.0 

$ 203,600.0 

$187,411.0 

$0.0 

$187,411.0 

($ 5,480.) 

190. 

0.0% 

0.0% 

16.7% 

0.0% 

0.0% 

3.4% 

0.0% 

0.0% 

0.2% 

-2.6% 

6.3% 

-2.1 % 

4.2% 

2.2% 

2.0% 

0.0% 

2.0% 

-0.1 % 

-0.0% 

Non variable & 

Profit Markup 

100 

= 71.2 

= 1.41 

:March 12. 1997 

6 
DOT Methodology Discussion

There are certain relevant issues that need to be addressed with

regard to applying the DOT methodology for forecasting prices for the

appliance standards rulemakings.

Implicitly assumes a complete pass-through of standards-induced

costs.

Relies on detailed engineering cost estimates, conducted by outside

contractors.

Relies on SEC 10-K reports for understanding the historic long-term

cost structure of the firm. In the appliance industry, for some of the

manufacturers the appliance business is only a part of the firm's total

business operations.

Derived markup rates do not recognize the real-life situation that

markups can be very different for different products in the product

line.

:March 12, 1997

7

 EE-PI-96-001 COMMENT 90

DOT Methodology Discussion 

There are certain relevant issues that need to be addressed with 

regard to applying the DOT methodology for forecasting prices for the 

appliance standards rulemakings. 

ltJ Implicitly assumes a complete pass-through of standards-induced 

costs. 

riJ Relies on detailed engineering cost estimates, conducted by outside 

contractors. 

ri/J Relies on SEC 10-K reports for understanding the historic long-term 

cost structure of the firm. In the appliance industry, for some of the 

manufacturers the appliance business is only a part of the firm's total 

business operations. 

[i/J Derived markup rates do not recognize the real-life situation that 

markups can be very different for different products in the product 

line. 

:March 12, 1997 

7 
Shipment Forecasts Panel and Open Discussion

Shipment Forecasts

for Input to GRIM

March 12, 1997

1

 EE-PI-96-001 COMMENT 90

Shipment Forecasts 

Shipment Forecasts 

for Input to GRIM 

Panel and Open Discussion 

March 12, 1997 

1 
Shipment Forecasts Objectives and Approach

In order to perform the cash-flow analysis, unit sales projections

must be prepared in the absence of standards and at several

regulation levels. Forecasting approaches include:

Expert Forecasts / Surveys

Develops forecasts through discussions with manufacturers,

retailers and other market experts.

Models developed for predicting national impacts

- Residential sector- REM, REEPS, NEMS, Spreadsheet

- Commercial sector- COMMEND, NEMS, Spreadsheet

Scenario Analysis

March 12, 1997

2

 EE-PI-96-001 COMMENT 90

Shipment Forecasts Objectives and Approach 

In order to perform the cash-flow analysis, unit sales projections 

must be prepared in the absence of standards and at several 

regulation levels. Forecasting approaches include: 

i .. JJ ....... I 

l .. ...l 

r.oJ, 

tVJ 

Expert Forecasts / Surveys 

.. Develops forecasts through discussions with manufacturers, 

retailers and other market experts. 

Models developed for predicting national impacts 

.. Residential sector- REM, REEPS, NEMS, Spreadsheet 

.. Commercial sector- COMMEND, NEMS, Spreadsheet 

Scenario Analysis 

March 12, 1997 

2 
Shipment Forecasts Scenario Analysis

Information obtained in the Industry databook can serve as the

starting point for the development of Expert Forecasts. Relevant

factors not usually considered in models include:

ll

► /I

►®l

Changes in sales distribution channels

Institutional factors such as future standards for competing products

Changes in consumer purchases, habits and tastes

Advertising and marketing strategies

Competitor's actions

Expert Forecasts can be collected through interviews or surveys.

March 12, 1997

3

 EE-PI-96-001 COMMENT 90

Shipment Forecasts Scenario Analysis 

Information obtained in the Industry databook can serve as the 

starting point for the development of Expert Forecasts. Relevant 

factors not usually considered in models include: 

r~ Changes in sales distribution channels 

r~··········1 , I 

'. j Institutional factors such as future standards for competing products 

:VJ ' I l .. ! Changes in c~nsumer purchases, habits and tastes 

[f/J Advertising and marketing strategies 

l./J Competitor's actions 

Expert Forecasts can be collected through interviews or surveys. 

March 12, 1997 

3 
9. (a) Please provide Information on shipments and valuati on of products shipped covering the past rive years

along with forecast Information for. 1979 through to 1983. if pgssible, also provide a forecast for

the entire industr y . (Assumes No Energy Efficiency Standards.),

Forecast

S = Shipments $ Valuation,

of Products,

f.o.b.

1. Production of All Relevant

Product Types

2. For Each Plant/Profit Center

a.

b.

C.

3. For Each Product Type

a.

b.

1974 1975 1976 1977 1978 .197,9 1980 1981 1902 1983

5 $ S $ 5 $ S $ S $ .S $ S $ S $ S $.

C.

 EE-PI-96-001 COMMENT 90

W 

\J1 

(X) 

.. : : I, ;.' 

. , ... ~." .. , ........... ,,' 

• '"., •••• ' ,'. r ...;. ... ~ ••••• " 

9, (Il) PleAse provide lnl'ormnt.i.on on shipments anrl valuatlon of pt'OductR 9hipl~ covodnq thA pa~t OVA Y":HltR 

along with l'orecast Inf0l'!"At1oll for. 1979 thr.ough t.o 1903 '.. t~ P,9.sRlble, 

. c 

the entire' industry. (Assumes 1-10 En~.rgy ~ffi,c~~1.1CY stalldc,r~~.~: ;,: " I. ,'.. I., t; .. ,'.' I. \ 

'Past Trend 

,I 

: 1 

al~~ provide a for.r-cant: for. " ,! 

Forecast 

S ." Shipments $ ." Valuation,. 

of Products, 

Lo . .,. 

1974 1975 19761977 1978 '.'197,9 1980' 1981 1902 198] •• 1\1 

~S~~$~S~_~$I~·S~~$~~S~~$~~S~·~$~·f~S __ ~$~·~S __ ~$~S~_$~~S~~$~_~S __ ~$ 

,. 

J 

c· • I :.:: l.: . • '. , \ i 1. Production of All Relevant ,J < I .< ':.: , :( I' Product Types , ! ::~ 

" .. , , ~ 

. . ~ 

I , .q .... , .. 2. For Each Plant/Profit Center' •• i 

a. 

b. .1 

c. 

3. For Each Product Type 

a. 

b. 

c. 

• 
+.t

4. Please explain changes in shipments and their vaiuaiion ( f.o.b.) on the basis of units by prodkict

type. In addition, please provide your best esti mate of whal: overall. industry shil.mmiAn W.I.] be

at the different effic iency levels. (Assume that these units will be modified to mcci the

indicated energy efficiency standards:)' Specify product type for which you nre responding.

Potenl:i it irncrgy lrfflciency 11ovein

tlnlts ( Mode,ln)

1,nnd Timers

shipmnntR

Value

Shipments

Value

2

3.

 EE-PI-96-001 COMMENT 90

IN 

\0 

'"" 

,.. ................ '".'" ~.'.)o, •• ~~. '.' • 

4. Pleas!? expJaitl challqe~ in Bh.lpmE'nb; ilnd thelr valllil!Joll (r.o.h.) Oil thfl ba~t~ of unitR hy prOf)\I~t 

type. 1n adcllHou, rleils~ pr.ovhle your beRt eAti.milb~ of who!: ovcrilll i ncllIR':ry RhJpmcn':!'l w.Il.1 be 

nl the dHfercnt efficlenc:y levels. (Assume that these unitA wlli be mmltr.led to mcot·thr. 

illJicnted cner9Y efficiency standar.ds." Spec:i.fy pr.oduct tY)lP for whlch 'you nrc rospond.lng • 

• 

PotenHnl F.norqy F.ff.lcimwy r,ovolA 

-----------t·-------------- ___ --.. ... ~ _______ ... -t __ .. __ •• , ..... _ _.__. ______ ......... ~.,_. __ ._, _____ ..... . 

unl ts (ModelA) 1 2 -.. ------ --~--- -----....----~I--- --~~-.----,. --..---------.... .---.,......-------.. ..--,---.,----, .... ' .. -.... -, ..... ----.---. ... ,. , 

',",-Ht "'lmaa 

"'" ...... -.. -_ ..... -. 'W-1lO"'nr'-n--ll1- ""'19'1fO'"r'~'''nJ ... _;_ .. ~ ....... ~ .. ~'.- ... -.. ~-~.- .. ~ ......... ~ .• , ... -".-~ ..... ~-~ .. ,-" .. , • ._ ......... , ... ________ • __ .............. ______ •• _ ...... _ •• __ ...... _. __ , ....... I __ .... _ .. ·_·· .. ··_ •• _ .... ··t __ ... ..--.·_ ... _-.. ·_t· _ .... _.,..' .• ' ..... _ ... t ,,~_ .. 

1. Ahtpmont.A 

Vll,t IIfl 

::1, Rh.tpmE;'ntA 

VAlue 

3. 
Shipment Forecasts Scenario Analysis

In making shipment forecasts, several scenarios will be considered to

bound uncertainty.

Constant Shipment Case

- Assumes that consumers' appliance purchase decisions are

insensitive to increases in, appliance price

Decreasing Shipment Case

- Assumes that consumers' appliance purchase decisions are very

sensitive to increases in appliance price

Historical Trend Case

Projects trend lines

Survey Results

Model Outputs

March 12, 1997

4

 EE-PI-96-001 COMMENT 90

Shipment Forecasts Scenario Analysis 

In making shipment forecasts, several scenarios will be considered to 

bound uncertainty. 

riJ Constant Shipment Case _ 

- Assumes that consumers' appliance purchase decisions are 

insensitive to -increases in appliance price 

(i/J Decreasing Shipment Case 

- Assumes that consumers' appliance purchase decisions are very 

sensitive to increases in appliance price 

[i/J Historical Trend Case 

- Projects trend lines 

ri/J Survey Results 

ri/J Model Outputs 

March 12, 1997 

4 
Non-Model Impact Evaluation

- Panel and Open Discussion

Presentation for the

Manufacturer Impact

Analyses Workshop

March 12,1997

U.S. Department of Energy

Office of Energy Efficiency

and Renewable Energy

1000 Independence Avenue, SW

Washington, DC 20585

 EE-PI-96-001 COMMENT 90

Non-Model Impact Evaluation 

- Panel and Open Discussion 

Presentation for the 

Manufacturer Impact 

Analyses Workshop 

March 12, 1997 

u.s. Department of Energy 

Office of Energy Efficiency 

and Renewable Energy 

1000 Independence Avenue, SW 

Washington, DC 20585 
Non-Model Impact Evaluation

nformation Gathering

Open Discussion

:March 12, 1997

1

 EE-PI-96-001 COMMENT 90

Non-Model Impact Evaluation Open Discussion 

:March 12. 1997 

1 
Information Gathering Interview Process

DOE proposes to gather greater public input through interviews and

surveys at all stages of the Manufacturer Impact Analyses.

The surveys developed with the help of DOJ, will be used to solicit

information from

- manufacturers, and

- other interested parties

a

The contents of the surveys and the list of interviewees will be publicly

vetted prior to initiating the interview process

Interviews will be scheduled well in advance to provide every

opportunity for key individuals to be available for comment

The interview process will focus on gathering information, both

qualitative and quantitative, on the possible impacts of potential

efficiency levels on:

- manufacturing costs and capital assets,

- product prices and shipments,

- direct employment, and

- industry competitiveness

:March 12, 1997

2

 EE-PI-96-001 COMMENT 90

Information Gathering Interview Process 

DOE proposes to gather greater public input through interviews and 

surveys at all stages of the Manufacturer Impact Analyses. 

:~ The surveys developed with the help of DOJ, will be used to solicit 

information from 

- manufacturers, and 

- other interested parties 

rVi The contents of the surveys and the list of interviewees will be publicly 

vetted prior to initiating the interview process 

i i '4/J .... ; ! 

~. _.i 

Interviews will be scheduled well in advance to provide every 

opportunity for key individuals to be available for comment 

The interview process will focus on gathering information, both 

qualitative and quantitative, on the possible impacts of potential 

eftrciency levels on: 

- manufacturing costs and capital assets, 

- product prices and shipments, 

- direct employment, and 

- industry competitiveness 

:March 12, 1997 

2 
Information Gathering Confidential Information

The interview process is designed to allow confidential information to

be gathered and considered in the rulemaking process.

The interview process will provide an opportunity for interested parties

to privately express their views on important issues

The interviewee will be given an opportunity to review the interview

summary to confirm the accuracy and protect the confidentiality of all

collected information

Confidential information will not be made available in the public

record, but will be considered in DOE's decision making process

'1%

The completed interview summaries will be collated and available in

the public record

In addition, DOE will use the interview process to identify additional

issues that might help in-conducting the impact analyses

:March 12, 1997

3

 EE-PI-96-001 COMMENT 90

Information Gathering Confidential Information 

The interview process is designed to allow confidential information to 

be gathered and considered in the rulemaking process. 

l./J The interview process will provide an opportunity for interested parties 

to privately express their views on important issues 

!~ The interviewee will be given an opportunity to review the interview 

summary to confirm the accuracy and protect the confidentiality of all 

collected information 

~Vi Confidential information will not be made available in the public 

record, but will be considered in DOE's decision making process 

ltJ The completed interview summaries will be collated and available in 

the public record 

,:1 ly] In addition, DOE will use the interview process to identify additional 

issues that might help in" conducting the impact analyses 

:March 12, 1997 

3 
Non-Model Impact Evaluation

nformation Gathering

ompetiti.ve Impacts

an ufactu ri n g Capacity

Employment Impacts

711 77T^,7 -17 7

jmulative Impacts

Open Discussion

:March 12, 1997

4

 EE-PI-96-001 COMMENT 90

Non-Model Impact Evaluation Open Discussion 

:March 12, 1997 

4 
Competitive Impacts Introduction

Legislation directs the Attorney General to determine the impact of

lessening of competition . The driving force in conducting an

assessment of the anti -competitive effects of appliance standards is

the protection of the ultimate customer.

The DOJ analysis consists in answering two questions:

(1) Is the standard likely to reduce the number of competitors?

- This will result in increased market concentration levels as

indicated by the Herfindahl Index.

(2) And if yes, does it matter to the customer?

Standards can cause enhanced market power which would

give the seller the ability to profitably maintain prices above

competitive levels for significant periods of time, thereby

resulting in a transfer of wealth from buyers to sellers.

The consumer assessment leads directly to evaluating the

impacts of standards on manufacturers.

;March 12, 1997

5

 EE-PI-96-001 COMMENT 90

Competitive Impacts Introduction 

Legislation directs the Attorney General to determine the impact of 

lessening of competition. The driving force in conducting an 

assessment of the anti-competitive effects of appliance standards is 

the protection of the ultimate customer. 

The DOJ analysis consists in answering two questions: 

(1) Is the standard likely to reduce the number of competitors? 

This will result in increased market concentration levels as 

indicated by the Herfindahllndex. 

(2) And if yes, does it matter to the customer? 

Standards can cause enhanced market power which would 

give the seller the ability to profitably maintain prices above 

competitive levels for significant periods of time, thereby 

resulting in a transfer of wealth from buyers to sellers. -

The consumer assessment leads directly to evaluating the 

impacts of standards on manufacturers. 

:March 12, 1997 

5 
Competitive Impacts Past Practice

Past DOE analysis, based on a "prototypical" firm, provided limited

assistance to DOJ in determining the likelihood of lessening of

competition.

Department of Energy (DOE)

• Focused on industry-average financial

analysis considering a hypothetical

"prototypical" firm

- Firm-specific analysis was not

conducted

• Provided useful preliminary market

characterization

- Number of firms

- Market shares

- Historical mergers and acquisitions

Department of Justice (DOJ)

• Focused on firm-specific financial

assessment

• Interviewed individual manufacturers to

assess the differential impacts of

standards

• Estimated fixed costs required by

different manufacturers to meet the

standards

Defined product-markets

niche vs. full-line

- geographical markets

- substitutions vs. extensions

:March 12, 1997

6

 EE-PI-96-001 COMMENT 90

Competitive Impacts Past Practice 

Past DOE analysis, based on a "prototypical" firm, provided limited 

assistance to DOJ in determining the likelihood of lessening of 

competi~ion. 

Department of Energy (DOE) 

• Focused on industry-average financial 

analysis considering a hypothetical 

"prototypical" firm 

- Firm-specific analysis was not 

conducted 

• Provided useful preliminary market 

characte rization 

- Number of firms 

- Market shares 

- Historical mergers and acquisitions 

Department of Justice (DOJ) 

• Focused on firm-specific financial 

assessment 

• Interviewed individual manufacturers to 

assess the differential impacts of 

standards 

• Estimated fixed costs required by 

different manufacturers to meet the 

standards 

• Defined product-markets 

. - niche vs. full-line 

- geographical markets 

- substitutions vs. extensions 

:March 12. 1997 

6 
Competitive Impacts Proposed Process

DOE is planning to work closely with DOJ from the earlier stages of

the rulemaking process in gathering information and conducting firmspecific analysis.

DOE will prepare an industry data book that will be used as a source

of historical market information

DOJ has offered help in drafting questions to be used by DOE in

manufacturer interviews

DOE is planning to gather firm-specific financial information and

impact assessments through interviews with manufacturers, that

would help assess:

Asymmetrical cost increases to some manufacturers

Increased proportion of fixed costs potentially increasing

business risk

Barriers to market entry (proprietary technologies, etc.)

The line of interrogation will follow the guidelines used by DOJ in

analyzing horizontal company mergers.

:March 12, 1997

7

 EE-PI-96-001 COMMENT 90

Competitive Impacts Proposed Process 

DOE is planning to work closely with DOJ from the earlier stages of 

the rulemaking process in gathering information and conducting firmspecific analysis. 

["JJ DOE will prepare an industry data book that will be used as a source 

of historical market information 

["JJ DOJ has offered help in drafting questions to be used by DOE in 

manufacturer interviews 

,t/J DOE is planning to gather firm-specific financial information and 

impact assessments through interviews with manufacturers, that 

would help assess: 

Asymmetrical cost increases to some manufacturers 

Increased proportion of fixed costs potentially increasing 

business risk 

Barriers to market entry (proprietary technologies, etc.) 

The line of interrogation will follow the guidelines used by DOJ in 

analyzing horizontal company mergers. 

:March 12. 1997 

7 
Non-Model Impact Evaluation

nforrnatio i Gathering

Gonipet itive Impacts

Manufacturing , Capacity

Employrn.ent Impacts

Open Discussion

:March 12, 1997

8

 EE-PI-96-001 COMMENT 90

Non-Model Impact Evaluation Open Discussion 

:March 12, 1997 

8 
Manufacturing Capacity Stranded Assets

The Process Rule directs DOE to consider if significant losses of

capital investment to domestic manufacturers would result from a

proposed standard.

New appliance standards can result in the obsolescence of existing

manufacturing assets resulting in losses of capital investments

Information required for making assessments of losses in capital

investments will be gathered during interviews with the manufacturers

The impact of loss on capital investments will depend largely on the:

- Stringency of the standard (radical vs. incremental change)

- Existing capabilities of the manufacturers

GRIM will be used to capture the financial impacts of stranded assets

- GRIM may be redesigned to account for asset write-offs

:March 12, 1997

9

 EE-PI-96-001 COMMENT 90

Manufacturing Capacity Stranded Assets 

The Process Rule directs DOE to consider if significant losses of 

capital investment to domestic manufacturers would result from a 

proposed standard . 

. 

,.i.·., 

~VJ New appliance standards can result in the obsolescence of existing 

manufacturing assets resulting in losses of capital investments 

Information required for making assessments of losses in capital 

investments will be gathered during interviews with the manufacturers 

:JJ The impact of loss on capital investments will depend largely on the: 

- Stringency of the standard (radical vs. incremental change) 

- Existing capabilities of the manufacturers 

. r./J GRIM will be used to capture the financial impacts of stranded assets 

- GRIM may be redesigned to account for asset write-offs 

:March 12, 1997 

9 
Non-Model Impact Evaluation

nforrnation Gatherin

ompetitive Impacts

Manufacturi ng Capacity

E mployment impacts

Cumulative Impacts

Open Discussion

:March 12, 1997

10

 EE-PI-96-001 COMMENT 90

Non-Model Impact Evaluation Open Discussion 

:March 12, 1997 

10 
Employment Impacts Direct and Indirect

DOE will estimate the direct and indirect impacts on employment as a

result of the implementation of proposed appliance standards .

Direct employment impacts would result if standards lead to a change

in the number of employees at

- manufacturing plants, and

- rel ated supply and service firms

Data pertaining to labor costs, obtained from the engineering analysis,

will help provide a first order estimate of direct impact on employment

The interview process is expected to provide additional insights into

the effect of proposed standards on direct employment

Indirect impacts may result as consumer expenditures are shifted due

to standards, affecting employment in other economic sectors-this

will be estimated using a macro-economic model

:March 12, 1997

11

 EE-PI-96-001 COMMENT 90

Employment Impacts Direct and Indirect 

DOE will estimate the direct and indirect impac~s on employment as a 

result of the implementation of proposed appliance standards. 

Direct employment impacts would result if standards lead to a change 

in the number of employees at 

- manufacturing plants, and 

- related supply and service firms 

Data pertaining to labor costs, obtained from the engineering analysis, 

will help provide a first order estimate of direct impact on employment 

r./J The interview process is expected to provide additional insights into 

the effect of proposed standards on direct employment 

,1, 

iVJ Indirect impacts may result as consumer expenditures are shifted due 

to standards, affecting employment in other economic sectors-this 

will be estimated using a macro-economic model 

:March 12, 1997 

11 
Non-Model Impact Evaluation

Information Gathering

ompetitive Impacts

Manufacturing Capacity,

Employment Impacts.

emulative Impacts

Open Discussion

:March 12, 1997

12

 EE-PI-96-001 COMMENT 90

Non-Model Impact Evaluation Open Discussion 

:March 12. 1997 

12 
Cumulative Impacts Introduction

The Department recognizes the importance of accounting for the

cumulative effects of multiple regulations on manufacturers.

Through the priority-setting process, regulations by other Federal

agencies and multiple DOE regulations on manufacturers will be

considered in determining rulemaking schedules.

The Department will consider cumulative burden in determining the

stringency of standards.

The Department recognizes that cumulative burden could result from

the interaction between standards for a system and components of

that same system.

The Department has committed to reducing cumulative burden by

delaying the effective dates of standards, if justified.

The Department will assess the joint impacts of its standards

occurring within years of each other.

:March 12, 1997

13

 EE-PI-96-001 COMMENT 90

Cumulative Impacts Introduction 

The Department recognizes the importance of accounting for the 

cumulative effects of multiple regulations on manufacturers. 

:VJ Through the priority-setting process, regulations by other Federal 

agencies and multiple DOE regulations on manufacturers will be 

considered in determining rulemaking schedules. 

[~ The Department will consider cumulative burden in determining the 

stringency of standards. 

,JJ The Department recognizes that cumulative burden could result from 

the interaction between standards for a system and components of 

that same system. 

rJJ The Department has committed to reducing cumulative burden by 

delaying the effective dates of standards, if justified. 

li/J The Department will assess the joint impacts of its standards 

occurring within years of each other. 

:March 12, 1997 

13 
Cumulative Impacts Qualitative

Through the interview process , non-model impacts will be considered

in the assessment of cumulative burden.

Ability to meet compounded financial and technological demands

Opportunity costs related to impeded funding of plant-productivity and

production innovation projects

Constrained R&D and engineering human resources

:March 12, 1997

14

 EE-PI-96-001 COMMENT 90

Cumulative Impacts Qualitative 

Through the interview process, non-model impacts will be considered 

in the assessment of cumulative burden. 

Ability to meet compounded financial and technological de'mands 

Opportunity costs related to impeded funding of plant-productivity and 

production innovation projects 

Constrained R&D and engineering human resources 

:March 12. 1997 

14 
Cumulative Impacts Quantitative Analysis

The Department will use an annual cash flow approach to determine

the quantitative impacts of regulatory burden.

Presently, GRIM supports three forms of multiple regulation analysis:

(1) Regulations on multiple products

- The procedure is straightforward, being the same as that for

regulation on a single product

(2) Several regulations on the same product

The procedure for this case involves building-up from several subanalyses

(3) A combination of both

:March 12, 1997

15

 EE-PI-96-001 COMMENT 90

Cumulative Impacts Quantitative Analysis 

The Department will use an annual cash flow approach to determine 

the quantitative impacts of regulatory burden. 

Presently, GRIM supports three forms of multiple regulation analysis: 

(1) Regulations on multiple products 

- The procedure is straightforward, being the same as that for 

regulation on a single product 

(2) Several regulations on the same product 

- The procedure for this case involves building-up from several subanalyses 

(3) A combination of both 

:March 12, 1997 

15 
A. Constant Markup Case

The new price is estimated from the following equation:

PriceNCW = PriceBaSe + MARKUP • AAVC

Where:

• Markup = PriceBase / AVCBase

• AVCBase = All variable costs in the base case

• AAVC = Change in All Variable Cost

All variable costs include the variable part of fixed costs.

• AAVC is the change in All Variable Costs due to the change in efficiency level.

 EE-PI-96-001 COMMENT 90

A. Constant Markup Case 

The new price is estimated from tryefollowing equation: 

PriceNew = PriceBase + MARKUP. ~A VC 

Where: 

• Markup = PriceBase / AVCBase 

• A VCBase = All variable costs in the base case 

• ~AVC = Change in All Variable Cost 

• All variable costs include the variable part of fixed costs . 

• ~AVC is the change in All Variable Costs due to the change in efficiency level. 

r 
B. Variable Markup Case

The introduction of an efficiency level tends to:

• decrease consumer operating expense, and

• increase purchase price.

• As energy expense becomes a smaller part, price becomes a larger part of total

expense, so consumers become more sensitive to price.

• Ignoring this effect by using the constant markup approach

overestimate markup, and underestimate the impact of stand'ar&

manufacturers.

 EE-PI-96-001 COMMENT 90

B. Variable Markup Case 

The introduction of an efficiency level tends to: 

• decrease consumer operating expense, and 

• increase purchase price. 

• As energy expense becomes a smaller part, price becomes a larger part of total 

expense, so consumers become more sensitive to price. 

• Ignoring this effect by using the constant markup approacn wiIJ- ~: 

overestimate markup, and underestimate the impact of standards: orrmanufacturers. 
3.4.3 Economic Markup Approach

Following is an example of price estimation for a general product, using an economic

approach to estimating price.

Define:

The base case price = PriceBase

The forecasted price (after standards) = PriceNe,

According to economic theory, the new price, PriceNew, is a markup over all variable

costs. Variable costs include both the direct manufacturing costs that vary with output

and the part of capital costs that vary with the amount of capacity converted to produce

the new product.

 EE-PI-96-001 COMMENT 90

3.4.3 Economic Markup Approach 

Following is an example of price estimation for a general product, using an economic 

approach to estimating price. 

Define: 

The base case price = PriceBase 

The forecasted price (after standards) = PriceNew 

According to economic theory, the new price, PriceNew, is a markup over all variable 

costs. Varhtble costs include both the direct manufacturing costs that vary with output 

and the part of capital costs that vary with the amount of capacity converted to produce 

the new product. 
DOT Methodology Common-sizing

The table presented below shows the common-sizing approach

applied to the 10-K financial reports of an appliance manufacturer:

iliance Manufacturer 1 991-1 995

Net sales $ 49,689.0 100.0%

Variable Manufacturing Costs $ 34,754.0 69.9 %

Contribution Margin $ 14,935.0 30.1 %

Fixed & Discretionary Costs:

Maintenance & Repairs $ 0.0 0.0 %

Research & Development $ 873.0 1.8 %

Selling, General & Admin. $ 9,094.0 18.3 %

Taxes Other Than Income $ 0.0 0.0 %

Pension Expense $ 59.0 0.1 %

Depreciation $ 1,794.0 3.6 %

Amortization, Tooling $ 0.0 0.0 %

Amortization, Intangibles $ 159.0 0.3%

SUBTOTAL $ 11,979.0 24.1 %

Income from Cont. Operations $ 2,956.0 5.9 %

Other Revenues and Gains $ 0.0 0.0 %

(Other Expenses and Losses) $ 0.0 0.0 %

Income before Interest, Taxes, Extr. Items $2,956.0 5.9 %

Interest Income (Expense) - Net ($ 806.0) -1.6 %

Income before Taxes and Extr. Items $ 2,150.0 4.3%

Provision for Income Taxes $ 950.0 1.9 %

Income after'Income Taxes $ 1,200.0 2.4 %

Earnings in Affiliates - Net $ 0.0 0.0 %

Earnings before Extr. Items $ 1,232.0 2.5 %

Extraordinary Items - Net $ 0.0 0.0 %

Other ($180.0) -0.4%

Net Income $ 1,052.0 2.1

f

Non variable & _ 100

Profit Markup 69.9

1.43

:March 12, 1997

6

 EE-PI-96-001 COMMENT 90

DOT Methodology Common-sizing 

The table presented below shows the common-sizing approach 

applied to the 1 O-K financial reports of an appliance manufacturer: 

Fixed & Discretionary Costs: 

-Maintenance & Repairs 

Research & Development 

Selling, General & Admin. 

Taxes Other Than Income 

Pension Expense 

Depreciation 

Amortization, Tooling 

Amortization Intan ibles 

Other Revenues and Gains 

(Other Expenses and Losses) 

Income before Interest, Taxes, Extr. Items 

Interest Income (Expense) - Net 

Income before Taxes and Extr. Items 

Provision for Income Taxes 

Income after'lncome Taxes 

Earnings in Affiliates - Net 

Earnings before Extr. Items 

Extraordinary Items - Net 

Other 

$ 0.0 

$ 873.0 

$ 9,094.0 

$ 0.0 

$ 59.0 

$ 1,794.0 

$ 0.0 

$ 159.0 

$ 0.0 

$ 0.0 

$ 2,956.0 

($ 806.0) 

$ 2,150.0 

$ 950.0 

$1,200.0 

$ 0.0 

$1,232.0 

$ 0.0 

180. 

0.0% 

1.8% 

18.3% 

0.0% 

0.1 % 

3.6% 

0.0% 

0.0% 

5.9% 

-1.6 % 

4.3% 

1.9% 

2.4% 

0.0% 

2.5% 

0.0% 

Non variable & 

Profit Markup 

100 

= 69.9 

= 1.43 

:March 12, 1997 

6 r 
1998 Design Option Analysis for Refrigerators

Design Option Marketing Utility Unit Cost Impact Incremental Product Cost

Design Option Feas. Sm Md T L Nat'l Labor Burden Ship Var. +/-

1. Increased Cabinet

Insulation Thickness

(sides, back, bottom)

a. .5 inches

b. 1.0 inches

c. 1.5 inches

a.

b.

c.

Investment & Expense

Design Option Depreciable Expensed Estimated Energy Savings

Tooling Bldg. & Equip. R&D kWh/yr Var. +/-

Increased Cabinet Insulation

Thickness (sides, back, &

bottom)

.5 inches

1.0 inches

1.5 inches

Design Feasibility and Marketing Utility Scales: Des. Feas: 0-100%, 100 = Highly Feasible,

NA = Option Used to meet 93 STD.

Mrk. Util: 0-100%, 100 = No Impact

*Note: Utilize Design Option Detail Data. Sheet to estimate option feasibility.

 EE-PI-96-001 COMMENT 90

1998 Design Option Analysis for Refrigerators 

Design Option Marketing Utility Unit Cost Impact Incremental Product Cost 

Design Option Feas. Sm Md Lg Mat' 1 Labor Burden Ship Var. +/-

1. Increased Cabinet 

Insulation Thickness 

(sides, back, bottom) 

a. .5 inches 

b. 1.0 inches 

c. 1.5 inches 

Investment & Expense 

Design Option Depreciable Expensed Estimated Energy Savings 

Tooling Bldg. & Equip. R&D kWh/yr 

1. Increased Cabinet Insulation 

Thickness (sides, back, & 

bottom) 

a. .5 inches 

b. 1.0 inches 

c. 1.5 inches 

Design Feasibility and Marketing Utility Scales: Des. Feas: 0-100%, 100 = Highly Feasible, 

NA = Option Used to meet 93 STD. 

Mrk. Util: 0-100%,100 = No Impact 

*Note: Utilize Design Option Detail Data. Sheet to estimate option feasibility. 

Var. +/-
MANUFACTURER COST-EFFICIENCY DATA

COSTS I

IDESIGN IMANUFACTURER ' SITECHNICAL FEASIBILITY( RAW LABOR I TOOLING PURCHASEDIPACKAGE / I COSTS I ESTIMATED I

(OPTIONS ORDER OF I (Present, Future ) MATERIAL I I PARTS ISHIPPINGI CONFIDENCE I EFFICIENCY(

ITABLE 1 I OPTIONS (Not Feasible) I I I ( I I (± x %) I I

_I

I

I

I

I

I

I

I

I I

I I

I

_i i_

I'

iI

I I I I I I

I I I .I I I .I

I I I I I I _i

I I I 1 I I I

I I I I I I

I I I I I I I

I i I I I I

I I I I I I I I

I I I I I ,I

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 EE-PI-96-001 COMMENT 90

MANUFACTURER COST -EFFICIENCY DATA 

1 .0 COSTS 

~~~~~~~~~--------------_I----------------~--~~~~~~~~ ----------------- IDESIGN IMANUFACTURER'SITECHNICAL FEASIBILITY 1 RAW : LABOR TOOLING PURCHASED PACKAGE/ COSTS ESTIMATED 1 

IOPTIONS ORDER OF I (Present, Future) 1 MATERIAL I PARTS SHIPPING CONFIDENCE EFFICIENCY 1 

ITABLE 1 OPTIONS 1 (Not Feasible) 1 I (± x %) I 

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