CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

TABLE OF CONTENTS

6.1 INTRODUCTION ........................................................................................................... 6-1

6.2 DISTRIBUTION CHANNELS ....................................................................................... 6-1

6.3 MARKUP CALCULATION PROCEDURE .................................................................. 6-2

6.3.1 Manufacturer Markups........................................................................................... 6-2

6.3.2 Distributor Markups............................................................................................... 6-3

6.3.2.1 Baseline Distributor Markup .......................................................................... 6-4

6.3.2.2 Incremental Distributor Markup..................................................................... 6-4

6.4 SALES TAXES ............................................................................................................... 6-8

6.5 SUMMARY OF MARKUPS .......................................................................................... 6-9

LIST OF TABLES

Table 6.3.1 Major Appliance Manufacturer Gross Margins and Markups............................. 6-3

Table 6.3.2 Data for Baseline Markup Calculation: Machinery, Equipment and 

Supplies Merchant Wholesalers (2007)............................................................... 6-4

Table 6.3.3 Data for Incremental Markup Calculation: Machinery, Equipment and 

Supplies Merchant Wholesalers........................................................................... 6-6

Table 6.3.4 Concentration by Four Firms for Commercial Clothes Washer 

Distributors and Route Operators ........................................................................ 6-7

Table 6.4.1 Average Sales Tax Rates by Censes Division and Large State ........................... 6-8

Table 6.5.1 Summary of Markups .......................................................................................... 6-9

LIST OF FIGURES

Figure 6.2.1 Channel for Commercial Clothes Washers.......................................................... 6-1

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CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

6.1 INTRODUCTION

To carry out the engineering and life-cycle cost (LCC) analyses, the U.S. Department of 

Energy (DOE) needed to determine the cost to the customer of a baseline product and the cost of 

more-efficient units. By applying a multiplier called a “markup” to the manufacturers’ 

equipment costs estimated in the engineering analysis, DOE estimated the consumer prices for 

baseline models and more-efficient equipment. 

6.2 DISTRIBUTION CHANNELS

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

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

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

their business costs and profit margin. For commercial clothes washers, DOE based the 

distribution channels (see Figure 6.2.1) on data developed by the Consortium for Energy 

Efficiency (CEE).

Source: CEE, 1998

Figure 6.2.1 Channel for Commercial Clothes Washers

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The CEE states that the relevant portions of the commercial, family-sized clothes washer 

market can be divided into three areas: laundromats, private multi-family housing, and large

institutions. Included as part of large institutions are military barracks, universities, housing 

authorities, lodging establishments, and health care facilities. For these three market areas, the 

CEE data indicate that an overwhelming majority of commercial clothes washers are sold 

through either distributors or route operators. Laundromats generally purchase their equipment 

through distributors, while multi-family housing and large institutions generally lease their 

equipment from route operators. For purposes of developing the markups for commercial 

clothes washers, DOE based its calculations primarily on data for the distribution channel that 

involves only distributors. DOE assumed that the markups and the resulting consumer 

equipment prices determined for the distribution channel involving distributors would be 

representative of the prices paid by consumers acquiring their equipment from route operators. 

6.3 MARKUP CALCULATION PROCEDURE

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

cover their business costs and profit margin. In financial statements, gross margin is the difference 

between the company revenue and the company cost of sales or cost of goods sold (CGS). Inputs for 

calculating the gross margin are all corporate costs—including overhead costs (sales, general, and 

administration), research and development (R&D) and interest expenses, depreciation, and taxes—

and profits. In order for sales of a product to contribute positively to company cash flow, the 

product’s markup must be greater than the corporate gross margin. Individual products may 

command a lower or higher markup, depending on their perceived added value and the competition 

they face from similar products in the market. 

In developing markups for manufacturers and distributors, DOE obtained data about the 

revenue, CGS, and expenses of firms that produce and sell the products of interest. DOE’s 

approach categorizes the expenses into two categories: fixed costs, which are fixed labor and 

occupancy expenses that increase in proportion to the amount of labor required to produce or sell 

the product, and variable costs, which are variable operating costs that do not scale with labor and 

vary in proportion to CGS. Together, fixed and variable costs represent the gross margin. 

6.3.1 Manufacturer Markups

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

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

markup (MUMFG) with the following equation:

MUMFG = CGSMFG + GMMFG

CGSMFG

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Where:

MUMFG = manufacturer markup,

CGSMFG = manufacturer’s cost of goods sold or manufacturer production cost (MPC), 

and

GMMFG = manufacturer’s gross margin.

The manufacturer’s CGS (or MPC) plus its gross margin equals the manufacturer selling 

price (MSP).

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

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

primarily engaged in appliance manufacturing and whose combined product range includes

commercial clothes washers (Table 6.3.1).

Table 6.3.1 Major Appliance Manufacturer Gross Margins and Markups

Mfr A Mfr B Mfr C

Average Net Revenues (Million) $359 $5,443 $10,000

Corporate Gross Margin 26.5% 14.5% 22.3%

Markup 1.36 1.17 1.29

6.3.2 Distributor Markups

DOE based the distributor markups for commercial clothes washers on financial data for 

the sector Machinery, Equipment and Supplies Merchant Wholesalers from the 2007 U.S. 

Census Business Expenses Survey (BES), which is the most recent available survey.1 This sector 

includes the subsector Laundry Machinery, Equipment, and Supplies, Commercial, Merchant 

Wholesalers, which specifically sells commercial clothes washers. However, as few data are 

available for this detailed subsector, DOE relied on the 2007 BES data for Machinery, 

Equipment and Supplies Merchant Wholesalers to estimate distributor markups.

DOE organized the financial data into statements that break down cost components 

incurred by firms in this category. DOE assumes that the income statements faithfully represent 

the various average costs incurred by distributors. Although firms in this sector handle multiple 

commodity lines, the data provide the most accurate available indication of expenses for selling 

commercial clothes washers.

The 2007 BES data provided for Machinery, Equipment and Supplies Merchant 

Wholesalers only contain total sales and detailed operating expenses. In order to construct a 

complete data set to estimate markups, DOE needed to estimate CGS and gross margin. The 

1997 Business Expenses Survey provides total sales, gross margin, and detailed operating 

expenses of Machinery, Equipment and Supplies Merchant Wholesalers.2 DOE found that gross 

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margin as a percent of sales has been roughly constant in this category from 1992 to 2010, 

averaging 27.1%.

3 Therefore, DOE assumed that the fractions of CGS and gross margin as a 

percent of sales in 2007 are the same as in 1997. Following this assumption, DOE calculated the 

CGS, gross margin, and net profit for Machinery, Equipment and Supplies Merchant 

Wholesalers from the 2007 BES. 

6.3.2.1 Baseline Distributor Markup

The baseline markup relates the manufacturer sales price of baseline products to the 

distributor sales price. DOE considers baseline models to be equipment sold under existing 

market conditions (i.e., without new energy efficiency standards). DOE calculated the baseline 

markup (MUBASE) for distributors as an average markup using the following equation:

MUBASE = CGSDist + GMDist

CGSDist

Where:

MUBASE = baseline distributor markup,

CGSDist = distributor’s cost of goods sold, and

GMDist = distributor’s gross margin.

Table 6.3.2 shows the calculation of the baseline distributor markup.

Table 6.3.2 Data for Baseline Markup Calculation: Machinery, Equipment and Supplies 

Merchant Wholesalers (2007)

Kind of business item

Amount 

($million)

Sales $328,820 

Cost of Goods Sold (CGS) $239,710 

Gross Margin (GM) $89,110 

Baseline Markup = (CGS+GM)/CGS 1.37

Source: U.S. Census, 2007 Business Expenses Survey (for Sales) and 1997 Business Expenses Survey (for CGS and 

GM shares)

6.3.2.2 Incremental Distributor Markup

Incremental markups are coefficients that relate the change in the manufacturer sales 

price of higher efficiency models to the change in the distributor sales price. DOE considers 

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higher efficiency models to be equipment sold under market conditions with new efficiency 

standards. The incremental markup reflects a situation in which the distributor faces an increase 

in CGS for a particular product due to new or amended standards.

Unfortunately, empirical evidence regarding appliance distributor markup practices when 

a product increases in cost (due to increased efficiency or other factors) is lacking. DOE 

understands that real-world markup practices will vary depending on the market conditions faced 

by distributors, on the magnitude of the change in CGS associated with an efficiency increase 

and on any associated changes in wholesale costs. Pricing may also involve rules of thumb that 

are difficult to know and to incorporate into DOE’s analysis.

Given the uncertainty about actual markup practices used by appliance distributors, DOE 

uses an approach that reflects the following two key concepts:

 

1. Changes in the efficiency of the goods sold are not expected to increase economic profits. 

Thus, DOE calculates markups/gross margins to allow cost recovery for wholesale

companies in the distribution chain (including changes in the cost of capital) without 

changes in company profits. 

2. Efficiency improvements impact some distribution costs but not others. DOE sets 

markups and prices to cover the distribution costs expected to change with efficiency but 

not the distribution costs that are not expected to change with efficiency. 

The incremental markup approach is described in more detail in Dale et al. (2004).4

To estimate incremental distributor markups, DOE divides distributors’ operating 

expenses into two categories: (1) those that do not change when CGS increases due to amended 

efficiency standards (“fixed”), and (2) those that increase proportionately with CGS (“variable”). 

DOE defines fixed costs to include labor and occupancy expenses, because these costs are not 

likely to increase as a result of a rise in CGS due to amended efficiency standards. All other 

expenses, as well as the net profit, are assumed to vary in proportion to CGS. Although it is 

possible that some of the other expenses may not scale with CGS, DOE is inclined to take a more 

conservative position and include these as variable costs. Note that under DOE’s approach, a 

high fixed-cost component yields a low incremental markup. 

DOE calculated the incremental markup (MUINCR) for distributors using the following 

equation:

MUINCR = CGSDist + VCDist

CGSDist

Where:

MUINCR = incremental distributor markup,

CGSDist = distributor’s cost of goods sold, and

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VCDist = distributor’s variable costs.

Table 6.3.3 shows the breakdown of operating expenses using the 2007 BES data. The 

incremental markup is calculated as 1.18.

Table 6.3.3 Data for Incremental Markup Calculation: Machinery, Equipment and 

Supplies Merchant Wholesalers

Amount 

($million)

Sales 328,820 

Cost of Goods Sold (CGS) 239,710 

Gross Margin (GM) 89,110 

Labor & Occupancy Expenses (“Fixed”)

Annual payroll 32,871 

Employer costs for fringe benefits 6,638 

Contract labor costs, including temporary help 572 

Purchased communication services 808 

Purchased repairs and maintenance to machinery and equipment 763 

Purchased repairs and maintenance to buildings, structures, and offices 462 

Lease and rental payments for machinery and equipment 492 

Lease and rental payments for buildings, offices, stores 2,655 

Purchased electricity 583 

Purchased fuels (except motor fuels) 220 

Water, sewer, refuse removal, and other utility payments 111 

Fixed Subtotal: 46,175 

Other Operating Expenses & Profit (“Variable”)

Expensed equipment 329 

Purchases of packaging materials and containers 390 

Purchases of other materials, parts, and supplies (not for resale) 1,321 

Expensed purchases of software 178 

Data processing and other purchased computer services 275 

Commission expense 1,213 

Purchased transportation, shipping and warehousing services 2,446 

Purchased advertising and promotional services 1,211 

Purchased professional and technical services 1,404 

Depreciation and amortization charges 2,461 

Taxes and license fees 917 

Other operating expenses 2 6,448 

Net profit before taxes 24,342 

Variable Subtotal: 42,935

Incremental Markup = (CGS+Total Other Operating Expenses and Profit)/CGS 1.18

Source: U.S. Census, 2007 Business Expenses Survey; U.S. Census, 1997 Business Expenses Survey

By dividing expenses into fixed and variable components, the incremental markup

approach envisions that distributors cover costs without changing profits. Although distributors 

may be able to reap higher profits for a time, DOE’s approach assumes that competition in the 

appliance distributor market, combined with relatively inelastic demand (i.e., the demand is not 

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expected to decrease significantly with a relatively small increase in price), will tend to pressure

margins back down. 

To measure the degree of competition, DOE estimated the four firm concentration ratio 

(FFCR) of commercial clothes washer sales in the two sectors included in the distribution 

channels: distributors and route operators. The FFCR represents the market share of the four 

largest firms in the relevant industry. Generally, an FFCR of less than 40% indicates that the 

industry is not concentrated, and an FFCR of more than 70% indicates that an industry is highly 

concentrated.5, 6

The 2007 Economic Census reports the FFCR of merchant wholesalers (including 

laundry equipment distributors) and service providers (including route operators) in aggregate 

and for many detailed subsectors.7, 8

 The FFCR of commercial clothes washer sales is equal to 

the sector FFCR times the percent of total sales within each sector accounted for by major 

appliances, which are estimated from the financial reports of distributors and route 

operators.

9, 10, 11, 12 DOE approximates the weighted aggregate FFCR for commercial clothes 

washer sales by weighting these sector FFCRs by the market share of each sector (Table 6.3.4).

Table 6.3.4 Concentration by Four Firms for Commercial Clothes Washer Distributors 

and Route Operators

Sector

Four Firm 

Concentration Ratio

(%of Sector Sales)

% of Revenue 

Accounted for 

by CCW

Four Firm 

Concentration Ratio

(% of CCW Sales)

Market 

Share (%

of CCW 

Sales)

Distributors 60.3 85 51.3 33.3

Route operators 26.5 5.1 1.4 66.6

Weighted 

Aggregate FFCR 18.0

Source: 2007 Economic Census (Note that distributors are represented by the sector NAICS 4238503 “Laundry and 

dry-cleaning equipment and supplies merchant wholesalers” and route operators are represented by the sector 

NAICS 81231 “coin-operated laundries and drycleaners”)

DOE’s estimation of the weighted average FFCR for commercial clothes washer sales is 

further supported by a 2011 IBISWorld Industry Report, which states that concentration in the 

sector is low.13 Note that the sector is referred to in the IBISWorld report as “Janitorial

Equipment Supply Wholesaling,” rather than “Service establishment equipment and supplies 

merchant wholesalers” as in the U.S. Economic Census. 

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6.4 SALES TAXES

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

equipment price. The sales tax is a multiplicative factor that increases the consumer equipment 

price.

DOE derived state and local taxes from data provided by the Sales Tax Clearinghouse

and population data from the U.S. Census.

14, 15 DOE derived population-weighted average tax 

values for each Census “Reportable Domain” (large states and groups of states), as shown in 

Table 6.4.1.

Table 6.4.1 Average Sales Tax Rates by Censes Division and Large State

Reportable Domain State(s) Tax Rate

(February 2013)

1 CT, ME, NH, RI, VT 5.13%

2 MA 6.25%

3 NY 8.40%

4 NJ 6.95%

5 PA 6.40%

6 IL 8.05%

7 IN, OH 7.06%

8 MI 6.00%

9 WI 5.45%

10 IA, MN, ND, SD 6.88%

11 KS, NB 7.14%

12 MO 7.50%

13 VA 4.00%

14 DE, DC, MD, WV 5.41%

15 GA 7.10%

16 NC, SC 6.98%

17 FL 6.65%

18 AL, KY, MS 7.25%

19 TN 9.45%

20 AK, LA, OK 8.66%

21 TX 7.95%

22 CO 6.10%

23 IA, MT, UT, WY 5.32%

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24 AZ 7.15%

25 NV, NM 7.38%

26 CA 8.45%

27 AK, HI, OR, WA 5.66%

DOE then derived a U.S. average tax value of 7.11% for commercial clothes washers 

based on the product’s saturation within each Census division.16 

6.5 SUMMARY OF MARKUPS

Table 6.5.1 summarizes the markups at each stage in the distribution channel and the 

average sales tax.

Table 6.5.1 Summary of Markups

Markup Baseline Incremental

Manufacturer 1.285

Distributor 1.37 1.18

Sales Tax 1.11

Overall 1.95 1.68

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REFERENCES

1. U.S. Census Bureau, Economic Census, Business Expenses Survey, Wholesale Trade, 

Machinery, Equipment and Supplies Merchant Wholesalers, 2007. (Last accessed 

February, 2013.) 

<http://www.census.gov/wholesale/www/historic_releases/annual_historic_releases.html

>

2. U.S. Census Bureau, Economic Census, Business Expenses Survey, Wholesale Trade, 

Machinery, Equipment and Supplies Merchant Wholesalers, 1997. Washington, D.C. 

3. U.S. Census Bureau, 2010 Annual Wholesale Trade Survey. 2010: Washington, D.C. 

http://www2.census.gov/wholesale/pdf/awts/2010_awts_salesinv_nomsbo_table2.pdf

4. Dale, L., D. Millstein, K. Coughlin, R. V. Buskirk, G. Rosenquist, A. Lekov, and S. 

Bhuyan, An Analysis of Price Determination and Markups in the Air-Conditioning and 

Heating Equipment Industry, 2004. Lawrence Berkeley National Laboratory. 

5. University of Maryland University College, Note on Industry Structure, 2002. (Last 

accessed February, 2013.) 

<http://info.umuc.edu/mba/public/AMBA607/IndustryStructure.html>

6. QuickMBA, Industry Concentration, 2010. (Last accessed February, 2013.) 

<http://www.quickmba.com/econ/micro/indcon.shtml>

7. U.S. Census Bureau, 2007 Economic Census, Establishment and Firm Size: (Including 

Legal Form of Organization), Wholesale Trade Subject Series, 2007. 

8. U.S. Census Bureau, 2007 Economic Census, Establishment and Firm Size: (Including 

Legal Form of Organization), Other Services (Except Public Administration) Subject 

Series, 2007. 

9. Mac-Gray Corporation, Form 10-K Annual Report Pursuant to Section 13 of 15(d) of the 

Securities Exchange Act of 1934, 2011. (Last accessed November, 2012.) 

<http://www.sec.gov/Archives/edgar/data/1038280/000104746912002365/a2207800z10-

k.htm#ds11601_item_8._financial_statements_and_supplementary_data>

10. Coinmach Corporation, 10-K Annual Report for Fiscal Year 2005, 2005 

<http://www.sec.gov/Archives/edgar/data/91693/000095012305007218/y09552e10vk.ht

m#106>

11. Coinmach Corporation, 10-K Annual Report for Fiscal Year 2007, 2007.

<http://www.sec.gov/Archives/edgar/data/1282858/000095012307008319/y35770e10vk.

htm>

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12. Alliance Laundry Systems, Alliance Laundry Holdings LLC Reports 2004 Sales and 

Earnings, 2005. Ripon, W.I. 

13. Culbert, K., Janitorial Equipment Supply Wholesaling in the US, 2011. <ibisworld.com>

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

county rates, 2013. 2013.) <http://thestc.com/STrates.stm>

15. Sales Tax Clearinghouse Inc., State Sales Tax Rates Along with Combined Average City 

and County Rates, 2014. (Last accessed January 10, 2014.) 

<http://thestc.com/STrates.stm>

16. U.S. Energy Information Administration, Residential Energy Consumption Survey, U.S. 

Department of Energy, Editor. 2009. 

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