Estimating Manufacturing Costs Panel and Open Discussion



# Estimating Manufacturing Costs for Input to GRIM

March 12, 1997 1 Estimating Manufacturing Costs Panel and Open Discussion



# Estimating Manufacturing Costs for Input to GRIM

March 12, 1997 

# rEstimating 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 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 2Estimating 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 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 , 3Estimating 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 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 4Estimating 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 ASHRAE 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 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 5Estimating Manufacturing Costs Evaluation



### Each approach has its areas of application
. Evaluation criteria for a specific application might include:



## ur f tim te • E t d c xpec e a c acy o es a s Time and cost of implementation • Opportunity for stakeholder involvement tment of uncertaint in avera • T e costs y rea g 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 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 

## 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 

## METHODS FOR COLLECTION OF ENGINEERING COSTS

• Development ofSurvey Forms Using Iterative Process with Manufacturers • Visits to Manufacturing Plants • Discussions with Suppliers • Literature Review • Use of Consultants

- Costing

- Modeling

- Engineering IssuesMANUFACTURER 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 -.' MANUFACTURER COST-EFFICIENCY DATA

- I COSTS 1 1 I 

# ., 1DESIGN 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. 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 

## 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 ofEfficiency 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 ofData, 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. 

## EXAMPLE OF USE OF SUBCONTRACTOR

• Issue was Cost ofInduced 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 ofDesign 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 

## 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

## 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 

### 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 20585Manufacturing Cost Estimates for the GRIM



### Cost Assessment^Approach Panel and Open Discussion

March 12, 1997 2 Manufacturing Cost Estimates for the GRIM Panel and Open Discussion

March 12, 1997 2Manufacturing 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 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 3Manufacturing Cost Estimates for the GRIM



### Objectives 

## Cost Assessment approach

Benefits o Panel and Open Discussion

March 12, 1997 4 Manufacturing Cost Estimates f9r the GRIM Panel and Open Discussion

March 12, 1997 4Manufacturing 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 CostAssessmentApproach 

### 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 5Manufacturing 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 Manufacturing Cost Estimates for the GRIM CostAssessmentApproach 

### 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 6Manufacturing 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 Manufacturing Cost Estimates for the GRIM CostAssessmentApproach 

## 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 7Manufacturing 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 Manufacturing Cost Estimates for the GRIM CostAssessmentApproach 

### 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 8Manufacturing 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 CostAssessmentApproach 

### 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 9Manufacturing Cost Estimates for the GRIM CostAssessmentApproach



## 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 Manufacturing Cost Estimates for the GRIM CostAssessmentApproach 

### 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 10Manufacturing 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% 111 W

March 12, 1997 11 Manufacturing Cost Estimates for the GRIM Panel and Open Discussion

March 12, 1997 11Manufacturing 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 

### 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 12Manufacturing 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 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 389 .039
.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 13Manufacturing 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 Manufacturing Cost Estimates for the GRIM Panel and Open Discussion

March 12, 1997 14Manufacturing 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 materialsMaterial and process selectionManufacturing - 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 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 15Manufacturing 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 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 16Manufacturing 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 Manufacturing Cost Estimates for the GRIM Panel and Open Discussion

March 12, 1997 17Manufacturing 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 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 18ave • Re • Inc • Reis········ • 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 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 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 7 111-; 711-

:77-7 1- 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 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 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 d

# vm

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 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
10.01.00 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
5Price Forecasts Panel and Open Discussion



# Manufacturing Price Forecasts for Input to GRIM

March 12, 1997 1 Price Forecasts Panel and Open Discussion



# Manufacturing Price Forecasts for Input to GRIM

March 12, 1997 1Price 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 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 2Price 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 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 3Price 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 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 4Price 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 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 5Price 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 Substitute products ,V!

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 Industry price sensitivity

## [~ Cost pass-through ,.) Substitute products

March 12, 1997 6SURVEY 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 B asic 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 th

is Sample EF ( I,0009 Investment

Required

- Estimated Energy Factor Resulting from Design Option Utilized



# FT . !!,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 DATE, _.......;.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 Domentic Shlp- Required Factor Resulting from Efficiency Required Date 

# . 'In Retail ments at this from Oeslgn Col. 6 Level (EF) (month, Price Sample EF OpUon UtiHzed 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 wa s your last gene ral -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 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:,?etitors? () •. :Less" Ulan your**ccn:pe~tOrs?** <'}

. •.**Al:>oi:~** tile**SaIn~** as you:- COl:lpe-::.itors? (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. )

35644 

### .A 4) v a U b 19 0 0 0 \ \ \ 0 N \ ►-1 rO

41 \ u! 1 Ail
°

a 'Utilelevelw::u..Qpri::escanbeset.E'orinstance,ifdemanc.grO'to.'"til(:ta-.-ke-::-:vt:a::teristic)in-:heindustryhasbeenlow(level).i":i.sm::.!.ikely.allotiler-:...--u.ngsbeingequal,thatpri::es::oul.:::inc=eassapp=ecic....1::(salesrecorc(data)::-equi.red).?a5'tcese::vG.".:.i.o....c:,:.l.sC't!Ssb:>,,'inma:ke<;cnarac-ceruticsc=havea::fe::tedyourcompany'Sability":0?asso=.ccs":sas,?!:'i.CEi:l::=eases'COconsumer.Indicatethesepriceincreaseswhicn:Iligh'to::::t:=:i.:ef:icie..'"l:::Y=egulationsprovetobecostlyto2!lall0:youranswersusequantitativedata..Demand•Significan:e0:priCEasabas:isfo=tion••?oreic;nt:i..cme!f..arketsha..."'"edistribution•Fo=ecas.U!Ccapac:::.tyutilizatia::DataRecruiredLevel.=ecordshigh/lowhigh/lowpricehigh/lowelasticitiesmarketsharehigh/lowdataindustrydispersed/sa1es..concentratedSaleshigh/lowauctioncapacity357,l

### DOT 

## Meth

## odology f

## or March 12 ,1997 U.S. Department of Energy Office of Energy Efficiency Esti

## matin

## g Manufactu 

## rer and Renewable Energy 1000 Independence Avenue, SW 

## M

## ark

## u p s Washington, DC 20585 

### 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 20585DOT Methodology Background



### The National Highway 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 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, 1997DOT 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 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 2DOT 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 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

3DOT 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 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 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 5DOT 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 Marg in $ 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 , Intan g ibles $ 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 DOT Methodology Common-sizing 

### The table presented below shows the common-sizing approach applied to the 1O-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 6DOT 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 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 7Shipment Forecasts Panel and Open Discussion



# Shipment Forecasts for Input to GRIM

March 12, 1997 1 Shipment Forecasts



# Shipment Forecasts for Input to GRIM Panel and Open Discussion

March 12, 1997 1Shipment 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 Shipment Forecasts Objectives andApproach 

### 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:



# .. JJ
....... i 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 2Shipment 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 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 39. (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. 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 .... , 

## .. •• i 2. For Each Plant/Profit Center' a. b. .1 

### c.

3. For Each Product Type a. b. c.

•+.t

4. Please expl ain changes in shipments a nd the ir vaiuaiion ( f.o.b.) on the basis of units by prodkict type. In addition, p lease provide your best esti mate of whal : overall. industry shil.mmiAn W.I.] be at the different effic i ency levels. (Assume that these units will be modified to mcci the indicated energy efficiency standards : )' Specify product type f or which you nre responding.
Potenl : i it irncrgy lrfflcienc y 11ovein tlnlts ( Mode,ln) 1,nnd Timers

shipmnntR Value Shipments Value 2

3. 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 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 

### 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 20585Non-Model Impact Evaluation



### nformation Gathering Open Discussion

:March 12, 1997 1 Non-Model Impact Evaluation Open Discussion

:March 12. 1997 1Information 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 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


# '4/J
.... i i ; !**~.** _.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 2Information 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 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 3Non-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 Non-Model Impact Evaluation Open Discussion

:March 12, 1997 4Competitive 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

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 5Competitive 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 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

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 6Competitive Impacts Proposed Process



### DOE is planning to work closely with DOJ from the earlier stages ofthe 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 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 7Non-Model Impact Evaluation



### nforrnatio i Gathering Gonipet itive Impacts Manufacturing , Capacity Employrn.ent Impacts Open Discussion

:March 12, 1997 8 Non-Model Impact Evaluation Open Discussion

:March 12, 1997 8Manufacturing 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 Manufacturing Capacity StrandedAssets 

### 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 9Non-Model Impact Evaluation



### nforrnation Gatherin 

### ompetitive 

# Im pacts Manuf

# act

## uring 

## Cap

## acity E 

## mployment impacts

Cumulative Impacts Open Discussion

:March 12, 1997 10 Non-Model Impact Evaluation Open Discussion

:March 12, 1997 10Employment 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 - 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 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 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 impacton 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 11Non-Model Impact Evaluation



### Information Gathering ompetitive Impacts 

## Manufacturing Capacity, Employment Impacts. emulative Impacts Open Discussion

:March 12, 1997 12 Non-Model Impact Evaluation Open Discussion

:March 12. 1997 12Cumulative 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 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 13Cumulative 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 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 14Cumulative 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 productThe procedure for this case involves building-up from several subanalyses (3) A combination of both

:March 12, 1997 15 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. A. Constant Markup Case 

### The new price is estimated from tryefollowing equation: PriceNew = 

### PriceBase 

## + MARKUP.**~A**

### VC 

### Where:

• Markup 

## =PriceBase / AVCBase • AVCBase = 

### All 

### variable costs in the base case
•**~AVC** = 

### Change in All Variable Cost

• All 

### variable costs include the variable part offixed 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. 

### B. 

### Variable Markup 

### Case The introduction ofan 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: orr

### manufacturers.

## 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. 

### 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 

### 99 1-1 

### 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 DOT Methodology Common-sizing 

### The table presented below shows the common-sizing approach applied to the 1O-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 

# r1998 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. 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

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