GENERAL SERVICES

ADMINISTRATION

Information on Pricing

Retail Packaging

Products

United States General Accounting Office

GAO Report to the Subcommittee on Treasury

and General Government

Committee on Appropriations

U. S. Senate

July 1999

GAO/GGD-99-116

United States

General Accounting Office

Washington, D.C. 20548

General Government Division

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GAO

July 7, 1999

The Honorable Ben Nighthorse Campbell

Chairman

The Honorable Byron L. Dorgan

Ranking Minority Member

Subcommittee on Treasury and General Government

Committee on Appropriations

United States Senate

This report responds to Senate Report 105-251 on the fiscal year 1999

Treasury and General Government Appropriations Act, which directs us to

examine the General Services Administration’s (GSA) retail packaging

products program. Retail packaging products include items such as boxes,

envelopes, and shipping sacks. GSA sells 27 of these products to federal

agencies, with the Postal Service being its largest customer. As agreed

with the Committee, our objectives were to determine whether (1) GSA is

required by law to set its prices for retail packaging products at levels

sufficient to ensure that all selling costs are recovered on each item and

(2) GSA’s selling prices for these items do recover all costs.

GSA is not required to, nor does it set prices to, recover all estimated costs

associated with selling retail packaging products on an item-by-item basis.

The statutory provision related to product pricing and cost recovery, 40

U.S.C. 756, specifically identifies the purchase price, transportation, and

the direct and indirect costs associated with contracting, handling, and

distributing products as the costs that GSA should recover, so far as

practicable, through its selling prices. However, the law does not require

GSA to use a specific method in recovering its costs or require GSA to

establish a price for an individual product that will recover all of the costs

associated with selling that product. Accordingly, GSA officials believe

that they are complying with the full cost recovery requirement mandated

in 40 U.S.C. 756, if the revenues for all products and services sold through

its General Supply Fund are at least equal to the total cost of operating the

Fund.1

 In fiscal years 1997 and 1998, GSA’s audited financial statements

showed that the Fund’s revenues exceeded its operating expenses.

Because the statute does not specify how GSA should implement full cost

recovery, does not require that GSA must recover cost on an item-by-item

 1

 The General Supply Fund, under the control and direction of the GSA Administrator, is used to

finance, on a reimbursable basis, a national supply system for federal agencies. This system includes

four business lines, under one of which retail packaging products are sold.

Results in Brief
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basis, and states that cost should be recovered so far as practicable, we

believe the method GSA is using to achieve full cost recovery is within its

discretion.

Our analysis of the 27 retail packaging products indicates that GSA’s

selling prices for the majority of these products were not sufficient to

ensure that all estimated costs associated with selling each individual item

were recovered from the sale of these products. Specifically, we found

that the actual pricing markups applied to these products were usually

lower than the individual product markups calculated by GSA’s cost

allocation model, which, according to GSA officials, is the most accurate

estimate of how much it costs GSA to sell each item individually. For

example, in fiscal year 1999, the markups used to determine selling prices

for 23 of the 27 retail packaging products were less than the markups

calculated by the cost allocation model. GSA officials told us that this is

not unusual because their objective is to recover cost on a business line

level and not on an item-by-item basis. They said that they do not use

individual product markups when establishing selling prices, and it is not

their objective to ensure that all costs associated with selling each

individual product are recovered from the sales of those products.

Instead, GSA groups similar products into what it calls a federal supply

class and applies a single markup to each class to determine its product

selling prices.

The federal supply class markups are determined through the use of the

cost allocation model and the professional judgement of supply officials.

Also, GSA officials said that even after the federal supply class pricing

markup has been determined and the recommended selling price has been

calculated, officials in the commodity center responsible for purchasing

and managing a particular item can adjust the selling price in order to

remain competitive. Given this situation, the thousands of products in its

inventory, and the needed flexibility to manage its diverse products, GSA

pricing officials said that it would be burdensome and impractical to

implement a system that tracks each product and ensures full cost

recovery on an item-by-item basis.

A primary mission of GSA’s Federal Supply Service (FSS) is to ensure that

the service and supply needs of federal agencies are efficiently and

effectively met at the least cost to the taxpayer. To accomplish this

mission, FSS operates four business lines--supply and procurement,

vehicle acquisition and leasing, property management, and travel and

transportation. These business lines operate under the General Supply

Fund, and each is composed of smaller components. For example, the

Background
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supply and procurement line consists of three methods of supply or

programs--schedules, special order, and stock. This report pertains

primarily to the stock program in which FSS purchases about 19,000

common-use products, places them into its inventory, and then resells the

products to federal agencies and other customers.2

 Products sold through

the stock program include tools, paints, photocopy paper, pens, pencils,

cleaning products, boxes, envelopes, and shipping sacks.

Among the boxes, envelopes, and shipping sacks offered through FSS’

stock program are 27 types of these products, which collectively are

referred to as retail packaging products. These products are included in 7

of the 271 classes of products sold under the stock program. FSS’ sales of

retail packaging products began to rise several years ago after the Postal

Service approached GSA with a proposal to buy these and other products

from GSA when GSA offered the best value. In fiscal year 1995, FSS sold

$3.4 million in retail packaging products to the Postal Service; and by 1998

this amount had increased to $6.8 million, or about 73 percent of total sales

for these products.

FSS is industrially funded, which means that generally the costs of the

products and services sold to federal agencies and other customers and

the costs of operating FSS’ programs are to be recouped from the prices

charged. GSA’s consolidated financial statements, which have received

unqualified opinions from independent auditors, demonstrate whether

revenues exceed expenses. As part of the product pricing process, FSS

considers actual costs and revenues from the accounting system, projected

budgetary costs, and other costs, such as depreciation, that are associated

with operating the overall Supply and Procurement business line and then

assigns these costs to each of the three methods of supply--schedule,

special order, and stock. Prices for products and services sold through

each supply method are determined differently. In the stock program, a

major part of the pricing process involves the use of a computer-based

model that calculates pricing markups for groups of products according to

their procurement, storage, handling, and transportation costs. FSS

centrally calculates recommended selling prices on a semiannual basis for

products sold through the stock program. The prices become effective on

the first day of October and April. However, item managers can adjust the

recommended selling price for any product at any time.

 

2

 For purposes of the General Supply Fund, the term “federal agency” is defined in 40 U.S.C. 472 as any

executive agency or any establishment in the legislative or judicial branch of the government except

the Senate, House of Representatives, and the Architect of the Capitol. Other entities, such as the

Postal Service, are also authorized to purchase products and services from GSA.
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GSA operates four major distribution centers located in Burlington, NJ;

Palmetto, GA; Fort Worth, TX; and Stockton, CA; and three smaller centers

located in Franconia, VA; Chicago, IL; and Auburn, WA, to receive, store,

and ship products purchased by federal agencies through the stock

program. In addition, there are 19 GSA Express Stores located throughout

the world, where customers can purchase and pick up products. In fiscal

year 1998 total sales for the stock program were $817 million. During this

same year, retail packaging product sales totalled $9.3 million, and about

73 percent of these sales were made to the U.S. Postal Service.

To accomplish our objectives, we reviewed the applicable statutory

provision, 40 U.S.C. 756, and GSA’s pricing policy and practices relating to

products sold by GSA through the FSS Supply and Procurement Program.

We obtained information on how the computer model was used to

establish product prices, including how it assigned direct and indirect

costs associated with selling each product. We also discussed the pricing

and management of retail packaging products with GSA officials from FSS’

headquarters in Arlington, VA, and several field locations involved in

pricing or distributing retail packaging products to customer agencies.

We did our work between November 1998 and May 1999, in accordance

with generally accepted government auditing standards. Appendix I

provides more details about our objectives, scope, and methodology. We

requested comments on a draft of this report from GSA’s Administrator

and the Postmaster General. GSA officials orally provided technical

comments, which we incorporated in the final report. The Postal Service

had no comments.

The statutory provision related to product pricing and cost recovery, 40

U.S.C. 756, does not require GSA to recover its costs associated with

selling products on an item-by-item basis and does not specify how GSA

should implement full cost recovery. The statute gives GSA wide latitude

in how to recover its costs. It is GSA’s view that as long as the revenues

obtained from all products and services sold under the General Supply

Fund cover the expenses of operating the Fund, GSA is complying with the

law.

The full cost recovery requirement became effective in 1988, after

Congress amended 40 U.S.C. 756 (a) by adding language that provides for

industrial funding of FSS and authorizes full cost recovery of the products

and services purchased by federal agencies and other customers.3

 

3

 Public Law 100-202, 101 Stat.1329-427 (1987) amended 40 U.S.C. 756(a) by adding subsection (a)(3),

which states that the general supply fund shall be available for paying other direct costs and indirect

Scope and

Methodology

GSA Is Not Required to

Recover Costs on an

Item-by-Item Basis
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Subsection (b) of this provision identifies the purchase price,

transportation, and direct and indirect costs associated with contracting,

handling, and distributing products as the costs that GSA should recoup

through its selling prices.4

 However, the law does not require that GSA use

a specific method in recovering its costs or require GSA to establish a price

for individual products that will recover all of the costs associated with

selling each product on an item-by-item basis. The statute provides that

GSA is to fix its product prices at levels to recover, so far as practicable,

the applicable purchase price, transportation, and other direct and indirect

costs associated with selling the products.

Since the inception of industrial funding GSA has interpreted the statute as

providing it with considerable discretion in determining how to achieve

full cost recovery. GSA’s 1988 Industrial Funding Implementation Plan5

recognized that the legislation provided a great deal of flexibility. GSA

officials said that the language of the statute, which provides that prices

should be fixed at levels to recover so far as practicable all applicable

purchase price and transportation and other direct and indirect costs

associated with the products it sells, suggests that Congress recognized

GSA should have latitude in establishing product prices and could not, in

all cases, recover the costs associated with selling each product.

Officials from GSA’s Office of General Counsel also told us that a private

company challenged GSA’s interpretation of the full cost recovery statute

in federal district court and they said GSA won this lawsuit.6

 It should be

noted, however, that the court did not address the claim that GSA’s pricing

methodology failed to comply with 40 U.S.C. 756(b). The Court dismissed

the complaint on the grounds that the plaintiff had failed to establish that it

had suffered an injury or that it was an intended beneficiary of the statute.

The United States Court of Appeals affirmed the lower court’s finding.

 costs that are reasonably related to contracting, procurement, inspection, storage, management,

distribution, and accountability of property and nonpersonal services provided by the General Services

Administration.

4

 Because 40 U.S.C. 756 identifies the specific costs that GSA should recover when selling products and

services under the General Supply Fund, the statute takes precedence over OMB Circular No. A-25,

which establishes federal policy regarding fees assessed for government services and for sale or use of

government goods and resources.

5

 The 1987 amendment to 40 U.S.C. 756 required that GSA prepare by Feb. 15, 1988, an Industrial

Funding Implementation Plan that (1) fully described and explained the accounting system (including

the pricing and cost allocation methodology for products and services) to be used for such

implementation and (2) contained a schedule for completing implementation of full cost recovery.

6

 T & S Products, Inc. v. United States Postal Service, General Services Administration, No. 94-896, 1994

U.S. Dist. Lexis 20751 at *1 (D.D.C. May 26, 1994;) aff.d 68 F. 3d 510 (D. C. Cir. 1995).
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GSA asserts that it is complying with the full cost recovery requirement

mandated in the law as long as the revenues for all products and services

sold through the General Supply Fund are at least equal to the costs of

operating the Fund. In the two most recently completed fiscal years--1997

and 1998--GSA’s audited financial statements, which FSS officials said

were prepared in accordance with Federal Accounting Standards Advisory

Board accounting principles, show that the General Supply Fund revenues

exceeded operating expenses by $119 million and $133 million,

respectively.7

 These revenues resulted from total sales of $2.8 billion in

fiscal year 1997 and $2.7 billion in fiscal year 1998. Because 40 U.S.C. 756

does not specify how GSA should implement full cost recovery, does not

require GSA to recover costs on an item-by-item basis, and states that

costs should be recovered so far as practicable, we believe the method

GSA is using to achieve full cost recovery is within its discretion.

Notwithstanding GSA’s discretion under the statute, it is GSA’s objective to

recover costs on each of the four business lines--supply and procurement,

vehicle acquisition and leasing, property management, and travel and

transportation--under the General Supply Fund from the activities within

each line. For example, FSS strives to recover the overall costs of

operating the supply and procurement business line, which includes retail

packaging products, from the sales of products and services provided

under this line. However, it is not FSS’ goal to recover costs on each of

the programs that are operated under this business line--schedules, special

order, and stock--or to recover costs on an item-by-item basis. According

to FSS officials, if the revenues produced by the schedules, special order,

and stock programs are at least equal to the total cost of operating the

supply and procurement business line, FSS has achieved its objective. In

fiscal year 1998, net income from the supply and procurement business

line was $22 million.

Because FSS focuses on recovering costs at the business line level and not

at the program or product level, FSS officials said that it is not surprising

that the price charged for a given product will not always cover all costs

associated with providing that product. On the contrary, the officials said

that the price charged for many products sold through the stock program

might not be sufficient to ensure that all costs associated with providing a

 

7

 According to FSS officials, 40 U.S.C. 491 authorizes FSS to retain revenues from the General Supply

Fund generated from agencies participating in the interagency fleet management system for the

purpose of replacing such motor vehicles and related equipment and supplies. Accordingly, FSS

estimated that it needed to retain $135 million and $124 million of the revenues generated in 1997 and

1998, respectively, for these purposes. Consequently, there was a revenue deficit of $16 million ($119

million minus $135 million) in 1997 and a revenue surplus of $9 million ($133 million minus $124

million) in 1998.

GSA Does Not Set

Prices to Recover the

Costs of Selling Each

Product Individually
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given product are recovered from the sales of those products. Our analysis

found that this was true for most of the retail packaging products sold at

the prices that were in effect at the beginning of fiscal years 1997 through

1999.

We compared the actual markups that FSS used to establish selling prices

for retail packaging products with the individual product markups

calculated by FSS’ cost allocation model. The results of our analysis show

that the selling prices established at the beginning of fiscal year 1997 for all

of the 22 retail packaging products for which we could calculate full cost

recovery prices were insufficient to fully recover FSS’ estimated costs of

selling these products. At the beginning of fiscal year 1998, 18 of the 27

retail packaging products, 67 percent, were priced at amounts insufficient

to recover all associated selling costs. At the beginning of fiscal year 1999,

23 of 27 (85 percent) product prices were initially established at levels that

would not fully recover all estimated costs.

Our analysis also showed that both the dollar and percentage differences

between the selling prices and the estimated full cost recovery prices for

retail packaging products were generally greater in 1997 than in the next 2

years. A dramatic example was the video cassette mailer. In dollars, the

full cost recovery price was higher than the selling price at the beginning

of each fiscal year for this product by $356.26 in 1997, $0.94 in 1998, and

$2.72 in 1999. FSS officials told us that the difference between a product’s

selling price and its full cost recovery price is influenced by several

factors, including the cost price8

 of the product, historical sales, and

projected sales. These officials explained that if a product has low

projected sales, the cost allocation model calculates a higher

recommended markup than it would if that product had higher projected

sales. This occurs because a product with low projected sales has fewer

units sold to help absorb the assigned costs. The FSS officials also said

that in 1997, some retail packaging products may have had low projected

sales and this, in turn, could have caused the products’ estimated full cost

recovery prices to be significantly higher than the products’ selling prices.

Appendix II provides the selling prices for each of the retail packaging

products offered at the beginning of the 3 fiscal years and the prices that

would have resulted if FSS had used the individual product markups in

determining product prices.

 8

 An item’s cost price is the weighted average cost of that item. The weighted average cost is

calculated on the basis of the cost and quantity of a product in inventory or on order and the additional

quantities expected to be ordered during the pricing period.
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According to FSS officials, the price that FSS pays for each product,

referred to as the cost price, is the beginning point of the pricing process.

Once the cost price for each product is known, FSS pricing officials use

the cost allocation model to assign program costs to each product and

calculate an individual product markup. FSS officials explained that

although the individual product markups represent the most accurate

estimate of how much it costs to sell each product individually, these

markups are not used to determine final product prices. Instead, similar

products are grouped into a federal supply class, and the cost allocation

model calculates an average markup for all items included in each class.

These markups are then adjusted on the basis of the professional judgment

of FSS pricing and supply officials, and the resulting markups become the

recommended pricing markups. The recommended markups are applied

to FSS’ cost prices to determine the recommended selling prices.

The list of recommended product selling prices, which are set

semiannually, is then sent to the appropriate commodity centers

responsible for purchasing and managing the products. Item managers

within each commodity center can adjust the recommended selling price

for any product in order to be able to offer competitive prices.

Furthermore, item managers can change the selling price for any product

at any time between the semiannual pricing cycles in order to remain

competitive with the private sector. According to a commodity center

official, item managers typically reduce the selling price to stay

competitive and raise the selling price to cover an increase in costs

resulting, for example, from a higher cost charged by an FSS supplier.

According to FSS officials, although several pricing alternatives were

considered when the Industrial Funding Implementation Plan was

completed in 1988, FSS determined that applying a pricing markup to each

federal supply class would provide the preferred pricing solution. FSS

officials said because they offer thousands of products, prices on these

products can change throughout the year, and FSS needs flexibility to

manage its diverse product lines; it would be impractical and burdensome

to monitor each product to ensure that all associated selling costs were

recovered on an item-by-item basis. In 1996, GSA’s Office of Inspector

General completed a review of the process FSS used to price products sold

through the stock program. The study concluded that FSS was generally

pricing products in an efficient and effective manner, and no alternative

pricing methods were identified.9

 9

 Advisory Review on Pricing of FSS Stock Program Items, GSA OIG, Audit Report A51844/F/6/V96012

(Mar. 19, 1996).
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The fact that many retail packaging products were priced at amounts that

do not recover all of FSS’ selling costs is not unique or unusual under the

stock program. FSS pricing officials with whom we spoke estimated that

two-thirds of the approximately 19,000 products sold through the stock

program are priced below full cost recovery. To test this estimate, we

requested that FSS query its pricing data pertaining to the stock program

in February 1999. The results showed that on 78 percent of the 18,946

products, the individual product markups--which FSS officials said is the

most accurate estimate of how much it costs FSS to sell each product--

were higher than the markups that were actually used to determine selling

prices. In 1992, we reported a similar situation in which many orders for

low-value products that GSA was selling through its stock program depots

were being subsidized by revenues from other products.10

FSS management recognizes that the stock program is facing difficult

challenges, including declining sales and changes in customers’ shopping

habits. Therefore, beginning in January 1999, GSA initiated a study to

explore strategic options for the stock program. The study group, which

includes senior managers, is focusing on several issues regarding the

future of its distribution centers’ operations. One option is to explore the

possibility of having a new FSS business model for the 21st century. As of

May 1999, no decisions had been made on what changes should be made to

the stock program, and time frames for making these decisions had not

been established. In our prior work, we reported that the Department of

Defense (DOD) also has examined its distribution system and achieved

some success in reducing the costs of providing medical and food products

to its customers and in reducing the quantities of these products in its

supply and distribution depots. DOD achieved this success by

implementing inventory management best practices developed by the

private sector. Among these best practices was the use of direct delivery,

whereby the private vendor delivers products directly to the customer

instead of to a DOD warehouse.11

Although the costs FSS incurs in transporting products to its customers

are included in the pricing process described above, FSS applies an

additional 7-percent charge to retail packaging products to cover the

increased transportation costs incurred on these products. According to

FSS officials, FSS sometimes incurs increased transportation costs

 

10 General Services Administration: Increased Direct Delivery of Supplies Could Save Millions

(GAO/GGD-93-32, Dec. 28, 1992).

11 Inventory Management: Greater Use of Best Practices Could Reduce DOD’s Logistics Costs (GAO/TNSIAD-97-214, July 24, 1997).

FSS Applies an Additional

Transportation Markup to

Retail Packaging Products
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because many of the retail packaging products ordered by the Postal

Service are shipped via the mail, and this mode of transportation is not

generally the most economical available to FSS. FSS uses the mail

because a written agreement between GSA and the Postal Service

stipulates that, when possible, orders shipped to Postal installations will

be mailed.

Because the Postal Service was buying most of FSS’ retail packaging

products, officials became concerned that the prices charged for these

products were not sufficient to cover the increased cost of shipping them

via the mail. Consequently, a one-time limited study of the transportation

cost on retail packaging products was completed in March 1995. On the

basis of this study, FSS began to apply an additional 7-percent markup to

retail packaging products sold in fiscal year 1997 and thereafter.

We attempted to verify the basis for this surcharge by reviewing the FSS

transportation cost study. However, we found that there was insufficient

documentation to allow us to determine the specific time period of the

study, the sample size, or the methodology that was used. Given that we

could not independently verify the merits of the 7-percent surcharge, we

did a limited analysis of the costs of shipping retail packaging products

using FSS-supplied data on orders that were shipped from three

distribution centers.

On these orders, we compared the actual shipping costs of retail packaging

products with the costs that FSS would have incurred if a more

economical mode of transportation had been used. Our analysis showed

that at two of the three locations the 7-percent surcharge used by FSS

exceeded the added transportation costs associated with retail packaging

products. Specifically, at the Fort Worth and Franconia distribution

centers, we found that a 4-percent and 6-percent surcharge, respectively,

would have covered the additional transportation costs for the retail

packaging products included in our analysis. However, at the Burlington

Distribution Center, we found that a surcharge of approximately 10

percent would have been necessary to fully cover the additional

transportation costs on the products we reviewed. As noted above, our

analysis of transportation costs was limited and was conducted only to get

a rough idea about the accuracy of FSS’ 7-percent surcharge. Therefore,

the results of our analysis cannot be projected to the universe of retail

packaging products shipped by each center or sold by FSS. Appendix I

provides more details on our methodology for analyzing transportation

costs and the orders that we reviewed.
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The applicable federal statute gives GSA considerable discretion in

determining how it is to achieve full cost recovery on products and

services sold through the General Supply Fund. Consequently, GSA is not

required to, nor does it, price all of its products at levels that will ensure

that all costs associated with selling each item individually are recovered

from the sale of the product. The prices that GSA set centrally for most of

the retail packaging products it sold in fiscal years 1997, 1998, and 1999

were not sufficient to recover all estimated costs associated with selling

each individual product. Nevertheless, we agree with GSA that the method

it has chosen to achieve full cost recovery is within its discretion under the

statute as long as the revenues obtained from all the products and services

sold under the General Supply Fund cover the expenses of operating the

fund.

On the other hand, a question that remains unanswered is whether GSA

should sell the majority of its products at prices that do not recover all

associated selling costs. GSA’s ongoing study of its stock program may

shed some light on this issue, if the study specifically addresses the costs

and benefits of the stock program to GSA and its customers.

On June 9, 1999, FSS Assistant Commissioners for Business Management

and Marketing and the Office of Distribution Management, their related

staff, and the Special Assistant to the FSS Controller provided oral

comments on a draft of this report. They agreed with the results of our

analysis and the message of the report. They also provided technical

comments, which we incorporated into this report to improve the clarity of

our description of the General Supply Fund and the cost allocation model.

On June 15, 1999, the U.S. Postal Service’s liaison to GAO said that the

Service had no comments on a draft of this report.

We are sending copies of this report to Senator George V. Voinovich,

Chairman, and Senator Richard Durbin, Ranking Minority Member,

Subcommittee on Oversight of Government Management, Restructuring,

and the District of Columbia, Senate Committee on Governmental Affairs;

Representative Jim Kolbe, Chairman, and Representative Steny H. Hoyer,

Ranking Minority Member, Subcommittee on Treasury, Postal Service and

General Government, House Committee on Appropriations; Representative

Steve Horn, Chairman, and Representative Jim Turner, Ranking Minority

Member, Subcommittee on Government Management, Information and

Technology, House Committee on Government Reform; Senator Kay

Bailey Hutchinson; the Honorable David J. Barram, Administrator, General

Services Administration; and Mr. William J. Henderson, Postmaster

General. We will also send copies to other interested congressional

Conclusions

Agency Comments
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committees and subcommittees and make copies available to others on

request.

Major contributors to this report are acknowledged in appendix III. If you

or your staffs have any questions, please contact me on (202) 512-8387 or

at ungarb.ggd@gao.gov.

Bernard L. Ungar

Director, Government Business

 Operations Issues
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Contents

1 Letter

Appendix I 16

Objectives, Scope, and

Methodology

Appendix II 19

Comparison of Retail

Packaging Products'

Selling Prices With

Prices Calculated

Using Full Cost

Recovery Markups

Appendix III 22

GAO Contacts and

Staff

Acknowledgments

Table II.1: GSA’s Fiscal Year 1997 Selling Prices vs. Full

Cost Recovery Prices

19

Table II.2: GSA’s Fiscal Year 1998 Selling Prices vs. Full

Cost Recovery Prices

20

Table II.3: GSA’s Fiscal Year 1999 Selling Prices vs. Full

Cost Recovery Prices

21

Tables

Abbreviations

FSS Federal Supply Service

GSA General Services Administration

USPS U.S. Postal Service

DOD Department of Defense
Page 15 GAO/GGD-99-116 Retail Packaging Products
Appendix I

Objectives, Scope, and Methodology

Page 16 GAO/GGD-99-116 Retail Packaging Products

Our objectives were to determine (1) whether the General Services

Administration (GSA) is required by law to set its prices for retail

packaging products at levels sufficient to ensure that all selling costs are

recovered on each item and (2) whether GSA’s selling prices for these

products do recover all costs. In doing our work, we primarily performed

audit work at GSA’s Federal Supply Service (FSS) headquarters located in

Arlington, VA. We also performed audit work at the FSS Office Supplies

and Paper Products Center in New York, NY; the Southwestern

Distribution Center in Fort Worth, TX; the Northeast Distribution Center in

Burlington, NJ; and a Forward Supply Point in Franconia, VA. In addition,

we interviewed an official from T&S Products, a private company that

competes with GSA to supply retail packaging products to the United

States Postal Service (USPS).

To meet the first objective, we reviewed the applicable statutory provision,

40 U.S.C. 756, relating to the pricing of products and services that FSS sells

to federal agencies and other customers under the General Supply Fund.

We also reviewed a court case in which a private company sued GSA

alleging that GSA’s pricing of retail packaging products was in violation of

40 U.S.C. 756. Additionally, we met with officials from GSA’s Office of

General Counsel to discuss the statutory requirements pertaining to

product pricing. Finally, we reviewed and summarized a prior GSA Office

of Inspector General report dealing with the subject of product pricing.

To meet our second objective, we assessed FSS’ pricing policy and

procedures pertinent to retail packaging products and other items sold

through the stock and procurement business line. We determined whether

the pricing policy and procedures were within GSA’s discretion under 40

U.S.C. 756(b), which provides that product prices be fixed at levels so as to

recover, so far as practicable, the applicable purchase price, and

transportation and other direct and indirect costs associated with selling

the products. We examined how FSS determined prices for retail

packaging products in fiscal years 1997, 1998, and 1999.

In completing our examination, we reviewed how the cost allocation

model was used in the product pricing process and the assumptions and

data that were used in determining the final product prices. We then

determined whether the prices set for retail packaging products at the

beginning of fiscal years 1997, 1998, and 1999 were sufficient to recover, so

far as practicable, the estimated costs associated with selling each item.

We did this by using FSS accounting and cost data, including the weighted

average cost price for each product, individual product markups
Appendix I

Objectives, Scope, and Methodology

Page 17 GAO/GGD-99-116 Retail Packaging Products

calculated by FSS’ cost allocation model, and the actual product selling

prices, as of the beginning of each fiscal year.

Specifically, we compared the selling prices for each of the retail

packaging products with the prices that would have been charged if FSS

officials had applied the individual product markups. Our analysis

assumed that the individual product markups represent the most accurate

estimates of what it actually costs FSS to sell each product. We used the

individual product markups and selling prices for products ordered

through FSS’ Customer Supply Centers because a large majority of retail

packaging products were ordered through these centers. While performing

our price analyses, we conducted limited testing on a sample of the FSS

cost and pricing data to determine the age, accuracy, and reasonableness

of these data. We also verified FSS’ cost prices for retail packaging

products by reviewing samples of contracts and inventory information.

In examining the transportation costs associated with retail packaging

products, we attempted to evaluate the FSS study that was completed in

1994 and its corresponding conclusion that an additional 7-percent markup

should be applied to these products. Our evaluation of this study was,

however, severely limited because we could not independently determine

the specific time period, sample size, or methodology that was used in the

study. Consequently, we tested the accuracy of the additional markup by

analyzing orders provided to us by FSS officials that included retail

packaging products. These orders were shipped from distribution centers

located in Burlington, NJ; Fort Worth, TX; and Franconia, VA. We verified

the accuracy of these orders before conducting our analyses. We examined

57 orders from Fort Worth that were shipped from January 28 through

January 31, 1999, and 50 orders shipped from Franconia, VA, from January

4 through January 29, 1999. We also examined 436 orders placed with the

Burlington center from February 1 through February 5, 1999. We used the

placement date in analyzing the Burlington data because some files

provided by FSS for this location did not specify shipping dates for the

orders.

Using the data from each distribution site, we determined the total dollar

value of sales, transportation costs, and the costs of using an alternative

transportation method for retail packaging products. We used this

methodology because GSA has an agreement with USPS that it will, when

possible, ship all mailable items to Postal facilities by the U.S. mail.

According to GSA officials, this method of transportation was frequently

used for retail packaging products, and it is often more expensive than

other methods of transportation. In analyzing the Fort Worth and
Appendix I

Objectives, Scope, and Methodology

Page 18 GAO/GGD-99-116 Retail Packaging Products

Burlington shipments we allocated the total actual and alternative

transportation costs to each item on a per pound basis. For the orders

shipped from Franconia, we did not have to complete this allocation

because the actual transportation costs could be reconstructed from

existing data. To enable us to calculate the alternative transportation cost,

FSS officials provided the lowest transportation cost that FSS would have

incurred if the USPS shipping requirements did not apply. We then

determined the difference between the actual and alternative

transportation costs and calculated the markup needed to recover the

additional transportation costs for each distribution center. Because of the

way the locations were selected and orders were obtained, we could not

combine the results of our analysis or project them to the population of

retail packaging products sold by each center or by FSS overall.

We did our work between November 1998 and May 1999, in accordance

with generally accepted government auditing standards. We did not,

however, validate the accuracy of all data that are included in the FSS cost

allocation model, and the results of our price analysis are not projectable

to all products sold by GSA. We requested comments on a draft of this

report from GSA’s Administrator and the Postmaster General. GSA

officials orally provided technical comments, which we incorporated in the

final report. The Postal Service had no comments.
Appendix II

Comparison of Retail Packaging Products'

Selling Prices With Prices Calculated Using

Full Cost Recovery Markups

Page 19 GAO/GGD-99-116 Retail Packaging Products

National stock number Item description--quantity FSS sell pricea

Full cost

recovery priceb

Differencec

Percent

differenced

7510-01-383-7967 Tape, with dispenser 2”X22’—6/package $7.37 $8.40 $(1.03) (14)

7520-01-368-3499 Stamp dispenser, plastic—25/box 3.51 3.92 (0.41) (12)

7530-01-372-3098 White envelope 6”X9”—50/box 4.51 10.25 (5.74) (127)

7530-01-372-3099 White envelope 9”X12”—50/box 5.47 9.78 (4.31) (79)

7530-01-372-3100 Green border envelope 10”X13”—50/box 5.66 14.37 (8.71) (154)

7530-01-372-3104 White envelope 6”X9”—250/box 14.97 22.46 (7.49) (50)

7530-01-372-3113 White envelope 9”X12”—250/box 18.14 21.64 (3.50) (19)

7530-01-372-3114 Green border envelope 10”X13”—250/box 22.54 24.72 (2.18) (10)

8105-00-281-1169 Shipping sack 14-1/4”X20”—50/package 17.93 21.79 (3.86) (22)

8105-00-281-1436 Shipping sack 10-1/2”X16”—100 sacks 23.12 28.03 (4.91) (21)

8105-01-385-7246 Shipping sack 6”X10”—50/package 8.60 258.18 (249.58) (2,902)

8105-01-385-7396 Shipping sack 8-1/2”X12”—100/package 19.79 112.03 (92.24) (466)

8105-01-385-7584 Shipping sack 10-1/2”X16”—50/package 16.58 67.22 (50.64) (305)

8105-01-386-2181 Video cassette mailer—25/package 15.16 371.42 (356.26) (2,350)

8105-01-386-2189 Audio cassette mailer—25/package 5.66 102.57 (96.91) (1,712)

8105-01-386-2202 Diskette mailer—25/package 9.65 Not available Not available Not available

8105-01-386-2209 Shipping sack 6”X10”—250/package 37.20 115.37 (78.17) (210)

8105-01-386-2217 Shipping sack 8-1/2”X12”—50/package 10.48 270.45 (259.97) (2,481)

8105-01-434-3492 Photo mailer 9-3/4”X12”—25/package Not available Not available Not available Not available

8110-01-386-2192 Square mailing tube 24”X3”X3”—15/bundle 19.24 Not available Not available Not available

8110-01-386-2214 Square mailing tube 36”X3”X3”—15/bundle 20.75 Not available Not available Not available

8115-01-357-9995 Shipping box 18”X12-1/2”X3”—15/bundle 14.84 16.93 (2.09) (14)

8115-01-357-9996 Shipping box 8”X8”X8”—15/bundle 8.00 11.64 (3.64) (46)

8115-01-357-9997 Shipping box 15”X12”X10”—15/bundle 17.18 19.26 (2.08) (12)

8115-01-364-9492 Shipping box 20”X14”X10”—15/bundle 22.39 25.29 (2.90) (13)

8115-01-386-2238 Shipping box 20”X20”X20”—15/bundle 35.91 Not available Not available Not available

8135-01-381-6525 Bubblewrap 16”X108’X3/16”—12/package 18.67 23.56 (4.89) (26)

Note 1: The gain or loss for each individual product cannot be extrapolated to the total sales of that

product during the fiscal year because each of the products may have been sold at different prices

throughout the year, and the quantities of products sold at these different prices were not readily

available.

Note 2: Parentheses denote the number is negative.

a

Sell price effective beginning on October 1, 1996, for products sold through the Customer Supply

Centers. All product selling prices are subject to change in April of each year and may be changed

throughout the year by item managers.

b

The full cost recovery price represents the cost price plus the individual product pricing markup as

calculated by FSS’ cost allocation model. According to FSS, the individual product markup

represents the most accurate estimate of how much it costs FSS to sell each item individually.

c

According to FSS, the higher difference between a product’s sell price and its full cost recovery price

may be due to low projected sales volume. The costs allocated to each unit are higher on a product

with low projected sales than on a product with high projected sales because the product with low

projected sales has fewer units sold to absorb the costs. As a result, a low sales projection for a

product could cause that product’s full cost recovery price to be significantly higher than its selling

price.

d

The difference as a rounded percentage of the FSS sell price.

Source: GAO analysis of FSS’ cost and sell prices and markups for retail packaging products.

Table II.1: GSA’s Fiscal Year 1997 Selling Prices vs. Full Cost Recovery Prices
Appendix II

Comparison of Retail Packaging Products' Selling Prices With Prices Calculated Using Full

Cost Recovery Markups

Page 20 GAO/GGD-99-116 Retail Packaging Products

National stock number Item description--quantity FSS sell pricea

Full cost

recovery priceb

Differencec

Percent

differenced

7510-01-383-7967 Tape, with dispenser 2”X22’—6/package $7.61 $6.23 $1.38 18

7520-01-368-3499 Stamp dispenser, plastic—25/box 3.99 6.63 (2.64) (66)

7530-01-372-3098 White envelope 6”X9”—50/box 8.98 10.20 (1.22) (14)

7530-01-372-3099 White envelope 9”X12”—50/box 10.18 12.20 (2.02) (20)

7530-01-372-3100 Green border envelope 10”X13”—50/box 9.84 13.44 (3.60) (37)

7530-01-372-3104 White envelope 6”X9”—250/box 27.30 24.58 2.72 10

7530-01-372-3113 White envelope 9”X12”—250/box 33.35 28.39 4.96 15

7530-01-372-3114 Green border envelope 10”X13”—250/box 37.69 32.60 5.09 14

8105-00-281-1169 Shipping sack 14-1/4”X20”—50/package 19.93 20.78 (0.85) (4)

8105-00-281-1436 Shipping sack 10-1/2”X16”—100 sacks 28.13 28.81 (0.68) (2)

8105-01-385-7246 Shipping sack 6”X10”—50/package 8.89 12.63 (3.74) (42)

8105-01-385-7396 Shipping sack 8-1/2”X12”—100/package 16.46 16.67 (0.21) (1)

8105-01-385-7584 Shipping sack 10-1/2”X16”—50/package 16.08 23.72 (7.64) (48)

8105-01-386-2181 Video cassette mailer—25/package 11.18 12.12 (0.94) (8)

8105-01-386-2189 Audio cassette mailer—25/package 5.03 6.32 (1.29) (26)

8105-01-386-2202 Diskette mailer—25/package 7.55 8.83 (1.28) (17)

8105-01-386-2209 Shipping sack 6”X10”—250/package 29.32 28.14 1.18 4

8105-01-386-2217 Shipping sack 8-1/2”X12”—50/package 10.58 16.91 (6.33) (60)

8105-01-434-3492 Photo mailer 9-3/4”X12”—25/package 12.27 11.49 0.78 6

8110-01-386-2192 Square mailing tube 24”X3”X3”—15/bundle 17.49 21.35 (3.86) (22)

8110-01-386-2214 Square mailing tube 36”X3”X3”—15/bundle 18.85 23.21 (4.36) (23)

8115-01-357-9995 Shipping box 18”X12-1/2”X3”—15/bundle 10.82 10.78 0.04 0

8115-01-357-9996 Shipping box 8”X8”X8”—15/bundle 5.32 7.58 (2.26) (42)

8115-01-357-9997 Shipping box 15”X12”X10”—15/bundle 9.90 11.56 (1.66) (17)

8115-01-364-9492 Shipping box 20”X14”X10”—15/bundle 14.05 15.27 (1.22) (9)

8115-01-386-2238 Shipping box 20”X20”X20”—15/bundle 27.36 26.07 1.29 5

8135-01-381-6525 Bubblewrap 16”X108’X3/16”—12/package 17.45 16.14 1.31 8

Note 1: The gain or loss for each individual product cannot be extrapolated to the total sales of that

product during the fiscal year because each of the products may have been sold at different prices

throughout the year, and the quantities of products sold at these different prices were not readily

available.

Note 2: Parentheses denote the number is negative.

a

Sell price effective beginning on October 1, 1997, for products sold through the Customer Supply

Centers. All product selling prices are subject to change in April of each year and may be changed

throughout the year by item managers.

b

The full cost recovery price represents the cost price plus the individual product pricing markup as

calculated by the FSS’ cost allocation model. According to FSS, the individual product markup

represents the most accurate estimate of how much it costs FSS to sell each item individually.

c

According to FSS, the higher difference between a product’s sell price and its full cost recovery price

may be due to low projected sales volume. The costs allocated to each unit are higher on a product

with low projected sales than on a product with high projected sales because the product with low

projected sales has fewer units sold to absorb the costs. As a result, a low sales projection for a

product could cause that product’s full cost recovery price to be significantly higher than its selling

price.

d

The difference as a rounded percentage of the FSS sell price.

Source: GAO analysis of FSS’ cost and sell prices and markups for retail packaging products.

Table II.2: GSA’s Fiscal Year 1998 Selling Prices vs. Full Cost Recovery Prices
Appendix II

Comparison of Retail Packaging Products' Selling Prices With Prices Calculated Using Full

Cost Recovery Markups

Page 21 GAO/GGD-99-116 Retail Packaging Products

National stock number Item description--quantity FSS sell pricea

Full cost

recovery priceb

Differencec

Percent

differenced

7510-01-383-7967 Tape, with dispenser 2”X22’—6/package $7.97 $6.44 $1.53 19

7520-01-368-3499 Stamp dispenser, plastic—25/box 4.35 7.63 (3.28) (75)

7530-01-372-3098 White envelope 6”X9”—50/box 2.44 3.42 (0.98) (40)

7530-01-372-3099 White envelope 9”X12”—50/box 4.17 6.45 (2.28) (55)

7530-01-372-3100 Green border envelope 10”X13”—50/box 5.17 7.22 (2.05) (40)

7530-01-372-3104 White envelope 6”X9”—250/box 10.66 11.14 (0.48) (5)

7530-01-372-3113 White envelope 9”X12”—250/box 16.73 17.01 (0.28) (2)

7530-01-372-3114 Green border envelope 10”X13”—250/box 18.96 18.89 0.07 0

8105-00-281-1169 Shipping sack 14-1/4”X20”—50/package 20.00 21.97 (1.97) (10)

8105-00-281-1436 Shipping sack 10-1/2”X16”—100 sacks 23.66 25.64 (1.98) (8)

8105-01-385-7246 Shipping sack 6”X10”—50/package 8.57 13.28 (4.71) (55)

8105-01-385-7396 Shipping sack 8-1/2”X12”—100/package 17.25 18.70 (1.45) (8)

8105-01-385-7584 Shipping sack 10-1/2”X16”—50/package 17.09 25.27 (8.18) (48)

8105-01-386-2181 Video cassette mailer—25/package 12.34 15.06 (2.72) (22)

8105-01-386-2189 Audio cassette mailer—25/package 5.01 7.84 (2.83) (56)

8105-01-386-2202 Diskette mailer—25/package 7.58 9.16 (1.58) (21)

8105-01-386-2209 Shipping sack 6”X10”—250/package 36.24 35.82 0.42 1

8105-01-386-2217 Shipping sack 8-1/2”X12”—50/package 10.63 18.18 (7.55) (71)

8105-01-434-3492 Photo mailer 9-3/4”X12”—25/package 8.68 9.81 (1.13) (13)

8110-01-386-2192 Square mailing tube 24”X3”X3”—15/bundle 10.21 12.41 (2.20) (22)

8110-01-386-2214 Square mailing tube 36”X3”X3”—15/bundle 11.51 13.70 (2.19) (19)

8115-01-357-9995 Shipping box 18”X12-1/2”X3”—15/bundle 11.12 12.80 (1.68) (15)

8115-01-357-9996 Shipping box 8”X8”X8”—15/bundle 6.30 10.77 (4.47) (71)

8115-01-357-9997 Shipping box 15”X12”X10”—15/bundle 12.19 14.75 (2.56) (21)

8115-01-364-9492 Shipping box 20”X14”X10”—15/bundle 16.32 18.42 (2.10) (13)

8115-01-386-2238 Shipping box 20”X20”X20”—15/bundle 32.76 36.74 (3.98) (12)

8135-01-381-6525 Bubblewrap 16”X108’X3/16”—12/package 18.98 18.02 0.96 5

Note 1: The gain or loss for each individual product cannot be extrapolated to the total sales of that

product during the fiscal year because each of the products may have been sold at different prices

throughout the year, and the quantities of products sold at these different prices were not readily

available.

Note 2: Parentheses denote the number is negative.

a

Sell price effective beginning on October 1, 1998, for products sold through the Customer Supply

Centers. All product selling prices are subject to change in April of each year and may be changed

throughout the year by item managers.

b

The full cost recovery price represents the cost price plus the individual product pricing markup as

calculated by FSS’ cost allocation model. According to FSS, the individual product markup represents

the most accurate estimate of how much it costs FSS to sell each item individually.

c

According to FSS, the higher difference between a product’s sell price and its full cost recovery price

may be due to low projected sales volume. The costs allocated to each unit are higher on a product

with low projected sales than on a product with high projected sales because the product with low

projected sales has fewer units sold to absorb the costs. As a result, a low sales projection for a

product could cause that product’s full cost recovery price to be significantly higher than its selling

price.

d

The difference as a rounded percentage of the FSS sell price.

Source: GAO analysis of FSS’ cost and sell prices and markups for retail packaging products.

Table II.3: GSA’s Fiscal Year 1999 Selling Prices vs. Full Cost Recovery Prices
Appendix III

GAO Contacts and Staff Acknowledgments

Page 22 GAO/GGD-99-116 Retail Packaging Products

Bernard Ungar (202) 512-8387

In addition to the individual named above, Gerald Stankosky, James

Cooksey, William Dowdal, Jeff Kaser, Alan Belkin, and Susan Michal-Smith

also made key contributions to this report.

GAO Contacts

Acknowledgments
Page 23 GAO/GGD-99-116 Retail Packaging Products
Page 24 GAO/GGD-99-116 Retail Packaging Products
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