CHAPTER 6. MARKUPS ANALYSIS

TABLE OF CONTENTS

6.1 INTRODUCTION ........................................................................................................... 6-1 6.2 DISTRIBUTION CHANNEL S ....................................................................................... 6-1 6.3 MARKUP CALCULATION METHODOLOGY ........................................................... 6-4 6.3.1 Assumptions ......................................................................................................... 6-4 6.3.2 Baseline Markups

................................................................................................. 6-5 6.3.3 Incremental Markups ........................................................................................... 6-6 6.4 NATIONAL WHOLESALE DISTRIBUTOR MARKUPS ............................................ 6-7 6.4.1 Markups for Wholesale Distributors of AC Equipment ...................................... 6-7 6.4.2 Markups for Wholesale Distributors of Prefabricated Wood and Metal Buildings 6-8 6.4.3 Markups for Wholesale Distributors of Prefabricated Co ncrete Buildings ......... 6-9 6.5 PREFABRICATED BUILDI NG MANUFACTURER MARKUPS ............................ 6-10 6.5.1 Prefabricated Wood Building Manufacturer Markups ...................................... 6-10 6.5.2 Prefabricated Metal Building Manufacturer Markups ....................................... 6-12 6.5.3 Prefabricated Concrete Building Manufacturer Markups .................................. 6-12 6.6 NATIONAL MECHANICAL CONTRACTOR MARKUPS ....................................... 6-13 6.7 NATIONAL GENERAL CONTRACTOR MARKUPS ............................................... 6-14 6.8 REGIONAL EQUIPMENT W HOLESALER MARKUPS ........................................... 6-15 6.9 REGIONAL CONTRACTOR MA RKUPS ................................................................... 6-16 6.10 SALES TAX .................................................................................................................. 6-17 6.11 OVERALL MARKUPS

................................................................................................. 6-17 REFERE NCES .......................................................................................................................... 6-21

LIST OF TABLES

Table 6.4.1 Expenses and Markups for Air-Conditioning Equipment Wholesale Distributors .......................................................................................................... 6-7 Table 6.4.2 Expenses and Markups for Prefabricated Wood Building Wholesale Distributors .......................................................................................................... 6-9 Table 6.4.3 Expenses and Markups for Prefabricated Metal Building Wholesale Distributors .......................................................................................................... 6-9 Table 6.4.4 Expenses and Markups for Prefabricated Concrete Building Wholesale Distributors ........................................................................................................ 6-10 Table 6.5.1 Expenses and Markups for Prefabricated Wood Building Manufacturers ............. 6-11 Table 6.5.2 Expenses and Markups for Prefabricated Metal Building Manufacturers .............. 6-12 Table 6.5.3 Expenses and Markups for Prefabricated Concrete Building Manufacturers ......... 6-13 Table 6.6.1 Expenses and Markups for Mechanical Contractors .............................................. 6-14 Table 6.7.1 Expenses and Markups for General Contrac tors .................................................... 6-15 Table 6.11.1 Summary of National Average Overall Markups on SPVU Equipment .............. 6-20

LIST OF FIGURES

6-iFigure 6.2.1 Distribution Channels for SPVU Equipment .......................................................... 6-2

6- iiCHAPTER 6 . MARKUPS ANALYSIS

6.1 INTRODUCTION

One of the most important inputs to the life -cycle cost (LCC) and payback period (PBP) analysis and the national impact analysis is the projected installed cost of sing le package vertical unit (SPVU) equipment. Installed cost includes equipment purchase price and installation costs. The U.S. Department of Energy (DOE) projects the equipment purchase price by using multipliers called “markups” that are applied to the manufacturer production cost (MPC) t o estimate the customer purchase price of the equipment. The SPVU manufacturer markup, projected as part of the engineering analysis, converts the MPC into manufacturer selling price (MSP). Distribution channel markups are then applied to the MSP based on how customers currently purchase the equipment. Distribution channel markups applied to MSP are the primary subject of this chapter.

To carry out the analyses, the U.S. Department of Energy ( DOE ) needed to determine how the distribution channel expenses and markups will change in response to the incremental change in the MSP of more efficient units the customer would purchase following the promulgation of new energy conservation standards. To account for that DOE estimated a baseline markup and an incremental markup for each of the distribution channel segments.

DOE defined a baseline markup as a multiplier that converts the MSP of equipment (the manufacturer or distributor price delivered to the work site) with baseline efficiency to the
customer purchase price for the equipment at the same baseline efficiency level. An incremental markup is defined as the multiplier to convert the incremental increase in MSP of higher efficiency equipment to the customer purchase price for the same equipment.

DOE also calculated weighted -average sales tax using the population of each state as the corresponding weight. DOE applied weighted average sales tax rate to the distribution channel markups to estimate overall markups for SPVU equipment.

In this chapter , DOE first d escribes the market distribution channels and the methodology used to derive baseline and incremental markups. DOE then summarizes the results for (1) national markups estimation for each of the distribution channel segments and (2) regional markups estimation. DOE differentiated markups between national and regional estimations because costs contributing to markups differ among regions of the country. In all installations, sales tax is applied to the final customer cost. The development of the approp riate sales tax rate is described in section 6.10.

6.2 DISTRIBUTION CHANNEL S

The appropriate markups for determining customer equipment prices depend on the types of distribution channels through which SPVU equipment moves 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.

6-1Based on a literature review and inquiries to the manufacturers, DOE believes that there

are multiple distribution channels for new SPVU equipment and multiple distribution channels for replacement SPVU equipment that together describe how the e quipment passes from the manufacturer to the final customer

. These are shown in Figure 6.2.1

. These market channels are partly based on interviews with the manufacturers, who provided information on the initial distribution of sales, the split among the final end use rs of the equipment, and the split between new and replacement units.

New Construction, SPVU Equipment on Temporary Buildings

Replacement SPVU Equipment

Figure 6.2.1 Distribution Channels for SPVU Equipment

The new equipment distribution channel describes the sale and distribution of SPVU equipment that is attached to modular buildings, such as portable school classrooms; relocatable (“temporary”) offices at construction, mining, and other job sites; non- relocatable (“permanent”) office and retail buildings constructed from modular components; communications shelters and other remote fac ilities. In this distribution channel

, the manufacturer of the SPVU equipment sells to a manufacturer of modular buildings, who then applies markup as part of its sales price for the building. Some of these sales are direct from a manufacturer of the SPVU equipment to a modular building manufacturer , but most appear to go through wholesale distributors of air

conditioning equipment and involve a wholesaler or distributor markup.

A fraction of all manufactured buildings is sold directly to the final custome rs via a general contractor . In this case, a general commercial contractor is assumed to purchase and install the modular or prefabricated building on behalf of the final customer, such as a school district or a telecommunications company. The contractor m arks up the cost of the SPVU equipment imbedded in the cost of the building. SPVU Manufacturer AC Distributor Modular Building Manufacturer General Contractor Customer Modular Building Distributor

SPVU Manufacturer AC
Distributor Mechanical Contractor Customer Modular Building Distributor

6-2Another fraction of the modular buildings is sold to modular building distributors, who either re -sell the modular buildings at wholesale or lease the modular buildings. Lease

ar

rangements for relocatable modular buildings are common in the construction industry and in other industries where the customer has a temporary need for office space at a job site. Distributors commonly lease a given relocatable building several times, and then sell the building in the used equipment market. Because modular building distributors must recover their operating costs whether they sell or lease modular buildings, DOE assumes for purposes of the notice of proposed rulemaking ( NOPR ) analysis that 1) a sale of a modular building would include a wholesale markup, and 2) any lease contract between the modular building distributor and final customer would include a factor that reflects the depreciation cost of the modular building itself (including the SPVU equipment ) as well as any additional distributor operating costs requiring a markup.

The replacement equipment distribution channel describes sales of SPVU equipment used
to replace failed or obsolete SPVU equipment

. This distribution channel includes some direct sales to mechanical contractors, who mark up the replacement equipment to cover handling costs and also charge the final customer for install ing it. Another fraction of the sales go es through a wholesale distributor of the AC equipment to the mechanical contractor who is replacing the equipment. Finally, some sales go through an AC equipment distributor to a modular building distributor who is engaged in leasing. It is likely that the se modular building distributors have their own replacement crews or have mechanical contractors under service contracts to conduct replacement activities. Either way, the modular building distributor markup would cover the costs of replacement and would not be a separate charge.

DOE believes that most SPVU units are used in modular buildings, specifically wood, metal and concrete prefabricated buildings. The distribution channels for wood and metal buildings were based on several annual reports from the Modular Building Institute 1

, 2

, 3

, 4

. Most of the concrete pref ab building manufacturers are not members of the Modula Building Institute, so a different set of information sources was used to characterize this SPVU distribution channel.

According to interviews with SPVU manufacturers, about 35 percent of all SPVU
equ ipment goes into telecommunications equipment shelters. Telecommunications shelters house electrical equipment for facilities such as radio towers, microwa ve relay towers, and cellular telephone towers. They often are manufactured out of concrete and steel for security reasons, although wood or steel telecommunications shelters are also common.

Most of the manufacturers of concrete telecommunications shelters are not members of the Modular Building Institute and also produce modular buildings and structures other than telecommunications shelters. However, based on an extensive online search of for a variety of concrete modular buildings, it appears that concrete modular buildings that use SPVU equipment are almost exclusively telecommunications equipment shelters. DOE reconciled the market splits and distribution of the equipment reported in each of the available sources.

6-36.3 MARKUP CALCULATION M ETHODOLOGY

For the NOPR, DOE examined how markups change by efficiency level for each of the following segment s in the distribution channel: 1. AC equipment wholesalers and distributors 2. Modular building manufacturers (wood, metal and concrete prefabricated buildings) 3. Modular building wholesalers and distributors (wood, metal and concrete prefabricated buildings) 4. General contractors 5. Mechanical contractors

Wholesale distributors, modular building manufacturers and distributors, and contractors mark up the price of the SPVU equipment to cover their business costs and profit margins. In financial statements, gross margin is the difference between the company revenue and the company cost of sales or cost of goods sold. The gross margin includes the company expenses, such as overhead costs (sales, general, and administration), research and development and interest expenses, and depreciation and taxes, as well as company profits. For sales of a product to contribute positively to company cash flow, the product’s markup must cover the co mpany’s gross margin. Equipment commands lower or higher markups depending on company expenses associated with the product and the degree of market competition.

DOE determined that markups are neither fixed -dollar nor proportional to all direct costs, which means that the selling price of a product may not be strictly proportional to the purchase price of the equipment. The main reason that the selling price of a product may not be strictly proportional to the purchase price of the equipment is that busin esses incur a wide variety of costs. When the purchase price of equipment and materials increases, only a fraction of the business expenses increase s (variant cost) , while the expenses for the remainder of the business stays relatively constant (invariant cost) . For example, if the unit price of SPVU equipment increases by 30 percent, it is unlikely that the cost of administrative support also would increase by 30 percent. Certain business expenses are uncorrelated with the cost of equipment or cost of good s.
Using the available data, DOE found measurable differences between incremental markups on direct equipment costs and the baseline markup on direct business costs for prefabricated building manufacturers and general contractors. Additionally, DOE discovered significant differences between baseline and incremental markups for mechanical contractors. Section 6.3.1 further discusses the differences between baseline and incremental markups. Sections 6.3.2 and 6.3.3 provide explanation how baseline and incremental markups are calculated, respectively.

6.3.1 Assumptions

DOE based the markups on industry- level financial data from the 2007 Economic Census and industry- reported data. DOE organized the financial data into representative income
statements that break down cost components incurred by (1) firms that sell air -cond itioning equipment at wholesale; (2) firms that manufacture and sell prefabricated/modular buildings; (3)

6-4firms that lease and sell prefabricated/ modular buildings; (4) general contractors that set up manufactured buildings on site; and (5) mechanical contracting firms that supply and install air

conditioning equipment. The key assumptions used to estimate markups using these financial data are as follows.

1. The representative income statements faithfully represent the various average costs incurred by firms selling or installing SPVU equipment and modular buildings.

2. These costs can be divided into two categories: (1) costs that vary in proportion to the MSP of SPVU equipment (“ variant ” costs); and (2) costs that do not vary with the MS P of SPVU equipment (“invariant” costs).

3. Overall, selling prices for SPVU equipment vary in proportion to business costs for SPVU equipment included in the income statements.

In support of the first assumption, the income statements itemize firm costs int o a number of expense categories, including direct costs to purchase or install the equipment, operating labor and occupancy costs, and other operating costs and profit. Although wholesalers, distributors, and mechanical contractors tend to handle multiple commodity lines, including room air conditioners, furnaces, central air conditioners, heat pumps, and boilers, the data provide the most accurate available indication of the expenses associated with SPVU equipment.

The second assumption is based on the in formation obtained from trade literature, selected manufacturers of SPVU equipment, and heating, ventilating, and air-conditioning (HVAC) contractors and consultants . This information indicates that contractor markups vary according to the quantity of labor and materials used to distribute and install appliances and equipment. In the following discussion, DOE assumes a division of costs between those that do not scale with the manufacturer price (labor and occupancy expenses) and those that do (operating ex penses and profit). This division of costs into variant and invariant is used as a basis for separating baseline markups and incremental markups.

In support of the third assumption, the SPVU supply chain is competitive, and customer demand for commercial heating and air conditioning is inelastic ( i.e., the demand is not expected to decrease significantly with an increase in the price of equipment). The large number of HVAC and other relevant firms listed in the 2007 Economic Census indicates the competitiv e nature of the market. For example, there are 724 HVAC manufacturers, 5 692 manufacturers of prefabricated wood buildings, 6 723 manufacturers of prefabricated metal buildings, 7 36,000 commercial and institutional building contractors, 8 and 91,000 HVAC contractors 9 listed in the 2007 Economic C ensus. Following standard economic theory, competitive firms facing inelastic demand either set prices in line with costs or quickly go out of business. 10

6.3.2 Baseline Markups

As discussed in section 6.3.1, primary information sources used to obtain financial
statements for this analysis provide data on the number of establishments, payroll for outside workers, and value of construction, cost of materials, cost of subcontracted work and other
expenses . Based on this financial information, DOE calculated the baseline markup f or each of the business types using the following equation:

6-5SubCost MatCost Pay V MU SALES BASE + + =
Eq. 6.1

Where:

MU BASE = baseline markup, V

SALES = value of sales

, Pay = payroll for workers (direct cost)

, MatCost = cost of materials (including purchased fuels and electric power), and SubCost = cost of subcontracted work.

Value of sales in this analysis corresponds to the sum of two income statement it ems shown in the detailed industry- level financial data: direct cost of goods sold and gross margin. The latter consists of labor expenses , occupancy expenses (rent, maintenance and utilities), and other operating expenses (depreciation, advertising and insurance), as well as operating profit. Payroll for workers appearing in the denominator is different from labor expenses included in gross margin as it represents direct labor costs and is therefore included in the direct costs of goods sold. Other two major cost categories in the direct cost of goods sold include cost of materials and cost of subcontracted work.

6.3.3 Incremental Markups

2007 Economic Census breaks down firm costs into a number of detailed expense categories, including direct costs to purchase or install the equipment, operating labor expenses and occupancy costs, as well as other operating costs and profit. Based on this breakdown, DOE

assumes that direct labor expenses and occupancy expe nses comprise the invariant cost, while other operating expenses and profit constitute the variant costs

. DOE estimated the incremental markups by only marking up those costs that scale with a change in the SPVU manufacturer’s sales price (variant costs, VC ) for higher energy efficiency products. DOE categorized the census cost data in each major cost category and estimated markups using the following equation:



### CGS VC CGS MU INCR 

### +

= Eq. 6.2

Where:

MU INCR = incremental markup, CGS = cost of goods sold, and VC = variant costs (other operating expenses and operating profit).

6-66.4 NATIONAL WHOLESALE DISTRIBUTOR MARKUPS

This section describes the markups estimation for the agents in the SPVU market channels that primarily perform a function of wholesalers and distributors. This category of agents includes AC equipment wholesalers and distributors , as well as wholesalers and distributors of modular buildings, including wood, metal and concrete prefabricated buildings.

6.4.1 Markups for Wholesale Distributors of AC Equipment

Wholesale distributors of air -conditioning equipment reported data in a confidential survey that the Heating, Air-conditioning & Refrigeration Distributors International (HARDI) conducted of membe r firms. 11 In the survey, HARDI itemized revenues and costs into cost categories, including direct equipment expenses (cost of goods sold), labor expenses, occupancy expenses, other operating expenses, and profit. DOE presents these data in full in appendix 6A. Table 6.4.1 summarizes the data as typical cost -per-dollar sales revenue in the first data column.

Table 6.4.1 Expenses and Markups for Air

- Conditioning Equipment Wholesale Distributo rs

Description Per Dollar Sales Revenue $ Per Dollar Cost of Goods $ Direct Cost of Equipment Sales: Cost of goods sold 0.73 9 1.000 Labor Expenses: Salaries and benefits 0.151 0.20 4 Occupancy Expense: Rent, maintenance, and utilities 0.035 0.04 7 Other Operating Expenses: Depreciation, advertising, and insurance 0.05 2 0.07 0 Operating Profit 0.02 3 0.0 31 Baseline Revenue: Baseline revenue earned per dollar cost of goods sold 1.3 53 Wholesaler Baseline Markup ( MU AC WHOLE BASE ) 1.3 53 Incremental Revenue: Increased revenue per dollar increase cost of goods sold 1.10 1 Incremental Markup ( MU AC WHOLE INCR ) 1.10 1 Source: Heating, Air

- conditioning & Refrigeration Distributors International. 201 3

. 2013 Profit Report (2012 Data)

. Profit Planning Group, Boulder, Colorado. (Last accessed February 27, 2014.) < http://www.hardinet.org/Profit

- Report >

In Table 6.4.1 , direct equipment expenses (cost of goods sold) represent about $0.739 per dollar sales revenue, so for every $1.00 wholesalers take in as sales revenue, $0.739 is used to pay the direct equipment costs. Labor expenses represent $0.151 per dollar sales revenue, occupancy expenses represent $0.0 35, other operating expenses represent $0.052, and profit accounts for $0.023 per dollar sales revenue.

DOE converted the expenses per dollar sales into expenses per dollar cost of goods sold by dividing each figure in the first data column in Table 6.4.1 by $0.739 ( i.e. , cost of goods sold per dollar of sales revenue). The data in column two show that, for every $1.00 the wholesaler spends on equipment costs, the wholesaler spends $0.204 to cover labor costs, $0.047 to cover occupancy expenses, and $0.070 for other operating expenses, and realizes $0.031 in profits. This totals to $1.353 in sales revenue earned for every $1.00 spent on equipment costs. Therefore, the wholesaler baseline markup ( MU AC WHOLE BASE ) is 1.353 ($1.353 ÷ $1.00).

Based on a survey of SPVU manufacturer websites, several use independent manufacturer’s representatives who substitute for an in-house sales force. These entities do not take delivery of equipment and do not maintain inventories , but t hey make sales calls, take

6-7orders, and facilitate deliveries and perform sales related services

. 12 Based on descriptions of manufacturer’s representatives found in the literature, these entities often charge their activities
as pa rt of the manufacturer’s delivered price but do not take a separate markup. For purposes of the NOPR, DOE assumes that manufacturer’s representatives’ sales comprise about half of the air -conditioning wholesale sales and are assumed to take no markup beyond the MSP ( i.e., the cost of their services is included in the MSP). Thus, the weighted average baseline markup for air

- conditioning equipment wholesaler is 1.177.

DOE also used the data in column two of Table 6.4.1 to estimate the incremental markups. The incremental markup depends on which of the costs in Table 6.4.1 are variant and which are invariant with MSP. For example, for a $1.00 increase in the MSP, if all of the other costs scale with the MSP ( i.e. , all costs are variant), the increase in wholesale price will be $1.353 , implying that t he incremental markup is 1.353 , or the same as the baseline markup. At the other extreme, if none of the other costs are variant, then a $1.00 increase in the MSP will lead to a $1.00 increase in the wholesale price, for an incremental markup of 1.0.

As a reasonable representation of market behavior, DOE believes that the labor and occupancy costs will be invariant and that the other operating costs and profit will scale with the MSP ( i.e. , be variant). In this case, for a $1.00 increase in the MSP, the wh olesale price wil l increase to match changes in “ other” operating costs plus operating profit of $0.075, which when divided by $0.739 in cost of goods sold yields an increase of $0.101, giving a wholesaler incremental markup ( MU AC WHOLE INCR ) of 1.101. See appendix 6A for cost details. Similar to the baseline markup, DOE assumes that manufacturer’s representatives take no incremental markup, resulting in a weighted average incremental markup of 1.051.

6.4.2 Markups for Wholesale Distributors of Prefabricated Wood and Metal Buildings

Wholesale markups for distributors of prefabricated modular buildings are derived from costs experienced by merchant wholesalers for both prefabricated wood buildings (North American Industry Classification System (NAICS) 423310) 13 an d prefabricated metal buildings (NAICS 423390), 14 published in the 2007 Economic Census. Table 6.4.2 and Table 6.4.3 summarize the gross margin (costs other than direct costs of goods sold, plus operating profit) per dollar of sales revenue in the first data column, and as a margin over direct costs of good s sold in the second column. For wood building distributors, direct equipment expenses (cost of goods sold) represent about $0.802 per dollar sales revenue, so for every $1.00 wholesalers take in as sales revenue, $0.802 is used to pay the direct equipment costs. Gross margin (which includes all other costs and profit) represents $0.198 per dollar sales revenue.

DOE converted the expenses per dollar sales into expenses per dollar cost of goods sold by dividing each figure in the first data column of Table 6.4.2 by $0.802 ( i.e. , cost of goods sold per dollar of sales revenue). The data in column two show that, for every $1.00 the wholesaler spends on equipment costs, $0.247 are spent to cover other costs and profits. This totals to $1.247 in sales revenue earned for every $1.00 spent on equipment costs. Therefore, the wholesaler baseline markup ( MU WOOD

_ BLDG

_ WHOLE

_ BASE ) is 1.247 ($1.247 ÷ $1.00). For metal building distributors, calculated in the same way, the wholesaler baseline markup is 1.456.

6-8Table 6.4.2 Expenses and Markups for P refabricated Wood Building Wholesale Distributors

Description Per Dollar Sales Revenue $ Per Dollar Cost of Goods $ Direct Cost of Equipment Sales: Cost of goods sold 0.80 2 1.000 Gross Margin : Other costs and operating profit 0.1 98 0. 247 Baseline Revenue: Baseline revenue earned per dollar cost of goods sold 1.247 Wholesaler Baseline Markup ( MU WOOD BLDG WHOLE BASE ) 1.247
Source: U.S. Census Bureau

. 2007. 423310 Lumber, plywood, millwork, and wood panel merchant wholesalers. EC0742SXSB06. Wholesale Trade: Subject Series - Misc Subjects: Gross Margin and its Components for Merchant Wholesalers for the United States: 2007 . (Last accessed October 29, 201 3 .)

< http://factfinder2.cen sus.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_42SXSB06&prodType=table >

Table 6.4.3 Expenses and Markups for Prefabricated Metal Building Wholesale Distributors

Description Per Dollar Sales Revenue $ Per Dollar Cost of Goods $ Direct Cost of Equipment Sales: Cost of goods sold 0. 68 7 1.000 Gross Margin: Other costs and operating profit 0. 31 3 0. 456 Baseline Revenue: Baseline revenue earned per dollar cost of goods sold 1.456 Wholesaler Baseline Markup ( MU METAL BLDG WHOLE BASE ) 1.456
Source: U.S. Census Bureau. 2007. 423390. Other construction material merchant wholesalers. EC0742SXSB06. Wholesale Trade: Subject Series - Misc Subjects: Gross Margin and its Components for Merchant Wholesalers for the United States: 2007

. (Last accessed October 29, 2013.) < http://factfinder2.census.gov/faces/t ableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_42SXSB06&prodType=table >
The sales weighted average of the two building distributor markup factors is 82.7% × 1.247 + 17.3% × 1.456 = 1.283. The market percentages for the split between wood and metal modular buildings (82.7% and 17.3%, respectively) are based on data for the period 2005 through 2010 from the Modular Building Institute cited in section 6.2

.
Published census cost data for this particular segment are not detailed enough to allow calculation of incremental markups or regional markups for wood and metal modular building distributors. Therefore incremental markup for these agents in the SPVU market channels is assumed to be the same as the baseline markup.

6.4.3 Markups f or Wholesale Distributors of Prefabricated Concrete Buildings

For the purposes of this analysis, primary designation of the concre te buildings with SPVU equipment is telecommunications and electronics shelters. The 2007 Census Bureau data on brick, stone and related construction material merchant wholesalers was used to derive the markups for concrete building wholesalers and telecommunications and electronics enclosures distributors. Table 6.4.3 summarize the gross margin (costs other than costs of goods sold, plus profit) per dollar of sales revenue in the first data column, and as a margin over costs of goods sold in the second column.

6-9Table 6.4.4 Expenses and Markups for Prefabricated Concrete Building Wholesale Distributors

Description Per Dollar Sales Revenue $ Per Dollar Cost of Goods $ Direct Cost of Equipment Sales: Cost of goods sold 0. 649 1.000 Gross Margin: Other (non

- labor, non

- occupancy) expenses and operating profit 0. 350 0. 539

Baseline Revenue: Baseline revenue earned per dollar cost of goods sold 1. 539 Wholesaler Baseline Markup 1. 539 *Detail may not add to total due to rounding. Source: U.S. Census Bureau. 2007. Brick, stone, and related construction material merchant wholesalers. Sector 42: . 423320 Other Construction Material Merchant Wholesalers. Brick, stone, and related construction material merchant wholesalers: Merchant wholesalers, except manufacturers' sales branches and offices. Detailed Statistics by Industry for the United States: 2007

. (Last accessed October 29, 2013.) < http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN _2007_US_42SXSB06&prodType=table >

As shown in the first column , the direct cost of sales (payroll and materials, including energy and subcontracted work) represents about $0.649 per dollar sales revenue to the concrete building wholesalers and distributors. Other (non-labor, non-occupancy) expenses and operating profit represents $0.350 per dollar of sales revenue.

DOE converted these expenses per dollar sales into revenue per dollar cost of goods sold by dividing each figure in the first data column by $0.649. The data in column two of Table 6.4.4 show that, for every $1.00 the concrete building distributor spends on equipment costs, the concrete building distributor earns $1.00 in sales revenue to cover the equipment cost, $0.539 to

cover other (non-labor, non-occupancy) expenses and operating profit. This totals to $1.539 in sales revenue earned for every $1.00 spent on equipment costs. Thus, the concrete building distributor baseline markup is 1.539. Incremental markup for prefabricated concrete building wholesale distributors is assumed to be the same as the baseline markup.

6.5 PREFABRICATED BUILDING MANUFACTURER MARKUPS

To estimate manufacturer markups for modular buildings , DOE collected financial data from U.S. Census Bureau on the prefabricated wood buildings sector (NAICS 321992) and the prefabricated metal buildings sector (NAICS 321311) in 2007 Economic Census . These sectors include establishments primarily engaged in factory

- based assembly of prefabricated buildings such as portable classrooms and offices. For concrete shelter manufacturers, DOE used financial data on the Other Concrete Product Manufacturing (NAICS 327390).

6.5.1 Prefabricated Wood Building Manufacturer Markups

The U.S. Census Bureau data for the prefabricated wood buildings, prefabricated metal buildings and prefabricated concrete buildings provide detailed statistics for th e industry as a whole in total dollars . Consistent with the assumptions stated in section 6.3.1, DOE assumed that the total dollar values that the U.S. Census Bureau reported, once converted to a percentage basis, represented revenues and expenses for an average or typical prefabricated building manufacturing business in the corresponding market segment. Table 6.5.1 summarizes the expenses for prefabricated wood building manufacturers per dollar sales revenue in the first data column (appendix 6A contains the full set of data).

6- 10Table 6.5.1 Expenses and Markups for Prefab ricated Wood Building Manufacturer s

Description Prefabricated Building Firm Expenses or Revenue * Per Dollar Sales Revenue $ Per Dollar Cost of Goods $ Direct Cost of Equipment Sales: Cost of goods sold 0.67 1 1.00 0 Labor Expenses: Fringe benefits 0. 056 0.08 3 Occupancy Expense: Rent, maintenance, and non

- energy utilities 0.0 19 0.0 28 Other Operating Expenses: Depreciation, advertising, and insurance 0.07 3 0.1 09 Net Profit Before Taxes 0.18 1 0. 27 0 Baseline Markup ( MU WOOD BLDG MFG BASE ): Revenue per dollar cost of goods 1.490 Incremental Markup ( MU WOOD BLDG MFG INCR ): Increased revenue per dollar increase cost of goods sold 1.379

*Detail may not add to total due to rounding. Source: U.S. Census Bureau. 2007. Prefabricated Wood Building Ma n ufactu ring. Sector 32: 321992. EC0731I 1 Manufacturing: Industry Series: Detailed Statistics by Industry for the United States: 2007

. (Last accessed October 29, 2013.) < http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_31I1&prodType=table >

As shown in the first column , the direct cost of sales (payroll and materials , including
energy and subcontracted work ) represents about $0.671 per dollar sales revenue to the wood building manufacturer. Labor fringe benefit expenses (employer’s cost for health insurance, pension plans, etc.) represent $0.05 6 per dollar sales revenue

, oc cupancy expenses represent $0.019 per dollar sales revenue, other operating expenses represent $0.073, and operating profit makes up $0.181 per dollar sales revenue.

DOE converted these expenses per dollar sales into revenue per dollar cost of goods sold by dividing each figure in the first data column by $0.671. The data in column two of Table 6.5.1 show that, for every $1.00 the wood building manufacturer spends on equipment costs, the wo od building manufactu rer earns $1.00 in sales revenue to cover the equipment cost, $0.083 to cover labor costs, $0.028 to cover occupancy expenses, $0.109 for other operating expenses, and $0.27 in profits. This totals to $1.49 in sales revenue earned for every $1.00 spent on equipment costs. Thus, the general contractor baseline markup ( MU WOOD

_ BLD

_ MF G_ BASE ) is 1.49.

DOE was also able to use the data in column two of Table 6.5.1 to estimate the incremental markups, after classifying the costs as either invariant or variant. At one extreme, if all of the other costs scale with the equipment price ( i.e. , all costs are variant), the increase in building manufacturer price will be $1.49, implying that the incremental markup is 1.49, or the same as the baseline markup. At the other extreme, if none of the other costs are variant, then a $1.00 increase in the equipment price will lead to a $1.00 increase in the building manufacturer price, for an incremental markup of 1.0. DOE believes the labor and occupancy costs to be invariant and the other operating costs and profit to scale with the equipment price ( i.e. , be variant). In this case, for a $1.00 increase in the equipment price, the building manufacturer price will increase by $1.3 79 , giving a wood building manufacturer incremental markup ( MU WOOD _B LD

_ MFG

_ INCR ) of 1.379. Although there likely is some regional variation in the prefabricated wood building markets, DOE has no data on the pattern of regional shipments, so DOE assumed that the base and incremental markups were the same in all parts of the country for this industry.

6- 116.5.2 Prefabricated Metal Building Manufacturer M arkups

Similar calculations were done for m etal b uilding manufacturers, as shown in Table 6.5.2 . Baseline markup for metal building manufacturers is 1.454, while the incremental markup equals 1.364.

Table 6.5.2 Expenses and Markups for Prefabricated Metal Building Manufacturers

Description Prefabricated Building Firm Expenses or Revenue * Per Dollar Sales Revenue $ Per Dollar Cost of Goods $ Direct Cost of Equipment Sales: Cost of goods sold 0. 688 1.00 0 Labor Expenses: Fringe benefits 0.04 4 0.06 4 Occupancy Expense: Rent, maintenance, and non

- energy utilities 0.0 18 0.0 26 Other Operating Expenses: Depreciation, advertising, and insurance 0.09 3 0.1 36 Net Profit Before Taxes 0.15 7 0.2 2 9 Baseline Markup ( MU METAL BLDG MFG BASE ): Revenue per dollar cost of goods 1.454 Incremental Markup ( MU METAL BLDG MFG INCR ): Increased revenue per dollar increase cost of goods sold 1.364

* Detail may not add to total due to rounding. Source: U.S. Census Bureau. 2007. Prefabricated Metal Building and Component Manufactu ring. Sector 33: 332311. EC0731I 1 Manufacturing: Industry Series: Detailed Statistics by Industry for the United States: 2007

. (Last accessed October 29, 2013.) < http://factfinder2.census.gov/faces/tableservices/jsf/pages/ productview.xhtml?pid=ECN_2007_US_31I1&prodType=table > The value of primary products shipped by the two industries in 2007 was $3.76 billion for wood buildings and $6.68 billion for metal buildings, and thei r respective shares of the market were 36.0 percent and 64.0 percent.

The sales

- weighted average baseline markup for prefabricated wood and metal building manufacturers was

(0.36 × 1.489 + 0.64 × 1.454) = 1.467.

Similarly, the sales

- weighted average for the incremental markup was

(0.36 × 1.379 + 0.64 × 1.364) = 1.369.

Weighted average values were used in the markup analysis.

6.5.3 Prefabricated Concrete Building Manufacturer Markups

The U.S. Census Bureau data for O ther C oncrete M anufacturing ( NAICS 327390) provide detailed statistics for the industry as a whole in total dollars

. Table 6.5.1 3 summarizes the expenses for prefabricated concrete building manufacturers as expenses per dollar s ales revenue in the first data column and per dollar cost of goods sold in the second data column.

As shown in the first column , the direct cost of sales represents about $0.570 per dollar sales revenue to the concrete building manufacturer. Labor expenses represent $0.061 per dollar

6- 12sales revenue, occupancy expenses represent $0.032 per dollar sales revenue, other operating expenses represent $0.164, and profit makes up $0.173 per dollar sales revenue.

Table 6.5.3 Expenses and Markups for Prefabricated Concrete Building Manufacturers

Description Prefabricated Building Firm Expenses or Revenue* Per Dollar Sales Revenue $ Per Dollar Cost of Goods $ Direct Cost of Equipment Sales: Cost of goods sold 0.570 1.000 Labor Expenses: Salaries (indirect) and benefits 0.061 0.108 Occupancy Expense: Rent, maintenance, and non

- energy utilities 0.032 0.057 Other Operating Expenses: Depreciation, Acctg, Advertising, Insurance, other 0.164 0.288 Net Profit Before Taxes 0.173 0.304 Baseline Markup : Revenue per dollar cost of goods 1. 756 Incremental Markup: Increased revenue per dollar increase cost of goods sold 1. 591

* Detail may not add to total due to rounding. Source: U.S. Census Bureau. 2007. Other Concrete Product Manufacturing: 2007. Sector 32: 327390. Manufacturing: Industry Series: Detailed Statistics by Industry for the United States: 2007 . (Last accessed October 29, 2013.)

< http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_31I1&prodType=table >
DOE converted expenses per dollar sales into revenue per dollar cost of goods sold by dividing each figure in the first data column by $0.570. For every $1.00 the concrete building manufacturer spends on equipment costs, the concrete building manufacturer earns $1.00 in sales
revenue to cove r the equipment cost, $0.108 to cover indirect salaries and benefits, $0.057 for
occupancy expenses , $0.288 for other operating expenses and $0.304 in net operating profit. This totals to $1.756 of revenue for every dollar in cost of goods sold, for a baseline markup of 1.756.

Calculation of the incremental markups requires separation of the invariant and variant costs. DOE believes the labor and occupancy costs to be invariant and the other operating costs and profit to scale with the equipment price ( i.e. , be variant). For every dollar in cost of goods sold, the concrete manufacturer earns $0.288 to cover the other operating expenses and $0.304 in profit. Therefore the variant costs that scale up incrementally equal $0.591. Therefore, for a $1.00 increase in the cost of goods sold, the concrete building manufacturer price will increase by $1.591, resulting in the incremental markup of 1.591.

6.6 NATIONAL MECHANICAL CONTRACTOR MARKUPS

To estimate mechanical contractor markups fo r SPVU equipment, DOE used detail ed 2007 Economic Census data for Plumbing, Heating, and Air- Conditioning Contractors (NAICS 238220) , defined as mechanical contractors for the purposes of this analysis. B aseline and incremental markups for mechanical contractors are shown in Table 6.6.1 . (Appendix 6A contains the full set of data used to calculate the incremental markup.)

DOE converted expenses per dollar sales into revenue per dollar cost of goods sold by dividing each figure in the first data column by $0.678. For every $1.00 the mechanical contractor spends on equipment costs, the mechanical contractor earns $1.00 in sales revenue to cover the equipment cost, and $0.474 to cover the other costs (labor, occupancy and other

6- 13operating expenses) . This totals $1.474 in sales revenue earned for every $1.00 spent on equipment costs, for a baseline markup ( MU MECH CONT BASE ) of 1. 474.

Calculation of the incremental markups requires separation of the invariant and variant costs. DOE believes the labor and occupancy costs to be invariant and the other operating costs and profit to scale with the equipment price ( i.e. , be variant). Therefore , for a $1.00 increase in the equipment price, the mechanical contractor price will increase by $1.184, resulting in the incremental markup ( MU MECH CONT INCR ) of 1.184.

Table 6.6.1 Expenses and Markups for Mechanical Contractor s

Description Contractor Expenses or Revenue * Per Dollar Sales Revenue $ Per Dollar Cost of Goods $ Direct Cost of Equipment Sales: Cost of goods sold 0.6 7 8 1.00 0 Labor Expenses: Fringe benefits 0.17 5 0.2 58 Occupancy Expense: Rent, maintenance, and utilities 0.02 2 0.03 2 Other Operating Expenses: Depreciation, advertising, and insurance 0.0 39 0.0 58 Net Profit Before Taxes 0.0 86 0.1 27 Baseline Markup ( MU MECH CONT BASE ): Revenue per dollar cost of goods 1.474 Incremental Markup ( MU MECH CONT INCR ): Increased revenue per dollar increase cost of goods sold 1.184

*Detail may not to total due to rounding. Source: U.S. Census Bureau. 2007. Plumbing, Heating, and Air

- Conditioning Contractors. Sector 23: 238220. EC0723I1: Construction: Industry Series: Preliminary Detailed Statistics for Establishments: 2007

. (Last accessed October 29, 2013.)

< http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_23I1&prodType=table >

6.7 NATIONAL GENERAL CONTRACTOR MARKUPS

To estimate general contractor markups for SPVU equipment, DOE collected financial data from the Commer cial and Institutional Building Construction (NAICS 236220) series, from the 2007 Economic Census.

DOE derived markups for general contractors from 2007 Economic Census data for the commercial and institutional building construction sector. The commercial and institutional construction sector includes establishments primarily engaged in construction work, including new construction work, additions, alterations, and repairs. The U.S. Census Bureau data for the construction sector include detailed statistics for establishments with payrolls, but the U.S. Census Bureau reports itemized revenues and expenses for the construction industry as a whole in total dollars rather than in typical values for an average or representative business. Because of this, DOE ass umed that the total dollar values that the U.S. Census Bureau reported, once converted to a percentage basis, represented revenues and expenses for an average or typical contracting business. Table 6.7.1 summarizes the expenses for general contractors as expenses per dollar sales revenue in the first data column ( appendix 6A contains the full set of data).

6- 14Table 6.7.1 Expenses and Markups for General Contractor s

Description General Contractor Firm Expenses or Revenue * Per Dollar Sales Revenue $ Per Dollar Cost of Goods $ Direct Cost of Equipment Sales: Cost of goods sold 0. 76 2 1.00 0 Labor Expenses: Salaries (indirect) and benefits 0.0 77 0.1 0 1 Occupancy Expense: Rent, maintenance, and utilities 0.01 0 0.01 3 Other Operating Expenses: Depreciation, advertising, and insurance 0.0 15 0.0 2 0 Net Profit Before Taxes 0.1 35 0. 1 77 Baseline Markup ( MU GEN CONT BASE ): Revenue per dollar cost of goods 1.311 Incremental Markup ( MU GEN CONT INCR ): Increased revenue per dollar increase cost of goods sold 1.197

*Detail may not to total due to rounding Source: U.S. Census Bureau. 2007. Commercial and Institutional Building Construction

. Sector 23: 236220. EC0723I1: Construction: Industry Series: Pr e liminary Detailed Statistics for Establishments: 2007

. (Last accessed October 29, 2013.)

< http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_23I1&prodType=table >

As shown in the first column , the direct cost of sales represents about $0. 76 2 per dollar sales revenue to the general contractor. Labor expenses represent $0. 077 per dollar sales revenue, occupancy expenses represent $0.01 per dollar sales revenue, other operating expenses represent $0.015, and profit makes up $0.135 per doll ar sales revenue.

DOE converted these expenses per dollar sales into revenue per dollar cost of goods sold by dividing each figure in the first data column by $0.762. The data in column two show that, for every $1.00 the general contractor spends on equipment costs, the general contractor earns $1.00 in sales revenue to cover the equipment cost, $0.101 to cover labor costs, $0.013 to cover occupancy expenses, $0.02 for other operating expenses, and $0.177 in profits. This totals to $1.311 in sales revenue e arned for every $1.00 spent on equipment costs. Thus, the general contractor baseline markup ( MU GEN CONT BASE ) is 1. 311.

DOE was also able to use the data in column two in Table 6.7.1 to estimate the incremental markups, after classifying the costs as either invariant or variant. At one extreme, if all of the other costs scale with the equipment price ( i.e. , all costs are variant), the increase in general contractor price will be $1. 311 , implying that the incremental markup is 1. 311, or the same as the baseline markup. At the other extreme, if none of the other costs are variant, then a $1.00 increase in the equipment price will lead to a $1.00 incr ease in the general contractor price, for an incremental markup of 1.0. DOE believes the labor and occupancy costs to be invariant and the other operating costs and profit to scale with the equipment price ( i.e. , be variant). In this case, for a $1.00 incr ease in the equipment price, the general contractor price will increase by $1.197 , giving a general contractor incremental markup ( MU GEN CONT INCR ) of 1.197.

6.8 REGIONAL EQUIPMENT W HOLESALER MARKUPS

Besides median national data , t he survey of HARDI member firms discussed in section 6.4 provided itemized revenue and cost data for typical firms in seven regions of the country (Table 6A.5.1, Appendix 6A). This allowed DOE to cal culate regional baseline and incremental markups in each region in the same way as reported in section 6.4

.

6- 15Each state in a given region could have been assigned the directly calculated regional markups. Instead of using this simplified approach DOE attempted to capture regional variability in markups. DOE calculated the ratio of the baseline markup and incremental markup in each region to the national average value calculated for all of the regions to derive relative markup values for each region, which were then assigned to each state. The equipment costs are multiplied by the national values for both baseline and incremental markups, and then multiplied by the relative state ratios for baseline and incremental markup.

For example, as shown in appendix 6A (Table 6A.5.2), the baseline and incremental markups for California (West region) ar e 1.404 and 1.110 respectively, which translates to state relative markup values of 1.038 and 1.007. The relative baseline equipment distributor markup for California (1.038) would be multiplied by the national markup factor of 1.353 from Table 6.3.1, yielding a baseline markup of 1.404. If i nstead the incremental markup was needed, the 1.007 incremental relative markup would be multiplied by the national incremental markup factor of 1.101 , yielding a n incremental equipment distributor markup value of 1.109.

6.9 REGIONAL CONTRACTOR MARKUPS

The 2007 Economic Census prov ides Geographic Area Series for both the Plumbing and HVAC Contractors (NAICS 23822) sector and for the Commercial and Institutional Building Contractors (NAICS 236220) sector. The geographic data series contain s tate

- level sale s and cost data , including value of construction, cost of subcontract work, cost of materials, and payroll for construction workers (Appendix 6A, Tables 6A.5.3 and 6A.5.4). U sing this regional cost detail , DOE was able to estimate baseline markups for each state for both sectors. Because the census does not provide more disaggregated cost data at the state level , DOE was un able to differentiate between invariant and variant cost.

DOE also calculated a state

- level relative baseline markup (Appendix 6A, last column in Tables 6A.5.3 and 6A.5.4), which equals to the ratio of each state’s baseline markup and the national average markup (Appendix 6A, Table 6A.5.3 and 6A.5.4, next to last column). The relative state values were then multiplied by the national values for both baseline and incremental markups (Tables 6.5.1 and 6.5.2). The advantage of this approach is that DOE is able to estimate regional markups based on the U.S. census data.

For example, as shown in appendix 6A , the mechanical contractor baseline markup for California is 1.539, while the national average is 1.477. Dividing the California value by the national average results in the relative mechanical contractor markup of 1.043 for California

. This relative mark up of 1.043 is then multiplied by the national mechanical markup factor of 1.474 (Table 6.5.4), yielding a mechanical contractor baseline markup of 1.537.

If instead the incremental markup was needed, the 1.043 relative markup value would be multiplie d by the mean incremental markup factor of 1.184 (Table 6.5.4) , yielding a mechanical contractor markup value of 1.235.

Similarly, for general contractors, the baseline California markup was 1.348. T he relative California ratio was 1.026 (Appendix A, Table 6A.5.4), and the California baseline and

6- 16incremental markup values were derived from their national values of 1.311 and 1.197 (Table 6.6.1) as 1.345 and 1.228, respectively.

6.10 SALES TAX

The sales tax represents state and local sales taxes that are applied to the customer price of the equipment. The sales tax is a multiplicative factor that increases the customer equipment price.

DOE derived state and local taxes from data provided by the Sales Tax Clearing House. 15 These data represent weighted averages that include county and city rates. Detailed sales tax data by each state can be found in appendix 6A.

6.11 OVERALL MARKUPS

The overall markup for each distribution channel is the product of the appropriate markups, as well as sales tax ( Table 6.11.1 ).

DOE used the overall baseline markup to estimate the customer product price of baseline models, given the manufacturer cost of the baseline models. As previo usly stated, DOE considers baseline models to be products sold under existing market conditions ( i.e. , without new energy conservation standards). The following equation shows how DOE used the overall baseline markup to determine the product price for new baseline models.



# ( )

BASE OVERALL MSP SALES BASE GEN GEN BASE BLDG DIST DISTRIB BASE MFG BASE WHOLE AC WHOLE AC MFG DIRECT AC MSP BASE

MU PRICE Tax GENINDEX MU PCT MU PCT MU MU PCT PCT PRICE CPP

_ _ __ _ __ _ __ ) ( ) (

× = × × ×+ × × × × + × =

Eq. 6.3

Where:

CPP BASE = custo mer product price for baseline models, PRICE MSP = m anufacturer sales price for baseline models, PCT AC

_ DIRECT

_ MFG = percentage of sales directly to building manufacturers, PCT AC

_ WHOLE = percentage of sales to a ir -conditioning equipment wholesalers and distributors, MU AC

_ WHOLE

_ BASE = average base line markup for a ir -conditioning equipment wholesalers and distributors, MU MFG

_ BASE = weighte d average baseline building manufacturer markup, PCT DISTRIB = percentage of buildings sold to wholesale distributors, MU DIST

_ BLDG

_ BASE = weighted average baseline building distributor markup, PCT GEN = percentage of buildings sold directly to contractors, MU GEN_ BASE = b aseline general contra ctor markup, GENINDEX = general contractor regional cost index

, Tax SALES = s ales tax (replacement applications only), and MU OVERALL

_ BASE = b aseline overall markup.

6- 17Similarly, DOE used the overall incremental markup to estimate changes in the customer product price for new energy

- efficient equipment, given changes in the manufacturer cost from the baseline model cost resulting from an energy conservation standard to r aise product energy efficiency. The total customer product price for more energy efficient models is composed of two components: (1) the customer product price of the baseline model and (2) the change in
customer product price associated with the increase in manufacturer cost to meet the new energy conservation standard. The following equation shows how DOE used the overall incremental markup to determine the customer product price for more energy efficient models ( i.e. , models meeting new energy conservati on standards).



# ( )

INCR OVERALL MSP BASE SALES INCR GEN GEN INCR BLDG DIST DISTRIB INCR MFG INCR WHOLE AC WHOLE AC MFG DIRECT AC MSP BASE OVERALL MSP STD



### MU PRICE CPP Tax GENINDEX MU PCT MU PCT MU MU PCT PCT PRICE MU PRICE CPP

_ _ __ _ __ _ __ _



### ) ( ) (

× D+= × × ×+ × × × × + × D + × =

Eq. 6.4

Where:

CPP STD = customer product price for models meeting new energy conservation standards, PRICE M

SP

= m anufacturer sales price for baseline models, MU OVERALL_BASE = baseline overall markup (product of manufacturer and general contractor markup and sales tax), and Δ

PRICE MSP = change in manufacturer sales price for higher energy efficient models, PCT AC

_ DIRECT

_ MFG = percentage of sales directly to building manufacture rs , PCT AC

_ WHOLE = percentage of sales to air -conditioning equipment wholesalers and distributors, MU AC

_ WHOLE

_ INCR = average incremental markup for air -conditioner wholesalers and distributors, MU MFG

_ INCR = weighted average incr e mental markup for manufacturer s of portable buildings for higher energy efficient models, PCT DISTRIB = percentage of buildings sold to wholesale distributors, MU DIST

_ BLDG

_ INCR = weighted average incremental building distributor markup, PCT GEN = percentage of buildings sold directly to contractors, MU GEN

_

INCR = i ncremental general contractor markup, GENINDEX = general contractor regional cost index, Tax SALES = s ales tax, CPP BASE = customer product price for baseline models, MU OVERALL

_ INCR = i ncremental overall markup.

DOE also calculated the overall baseline markup for replacement models. The following equation shows how DOE used the overall baseline markup to determine the baseline product price for replacement models.

6- 18BASE OVERALL MSP SALES BASE BLD DIST DISTRIB BASE WHOLESALE AC BASE MECH MECH AC BASE WHOLESALE AC MECH

MSP BASE

MU PRICE Tax MU PCT MU MECHINDEX MU INDEX WHSLBASE PCT MU PCT

PRICE CPP

_ __ _ _ _ _ _ _

) ) ((

× =    

 

   

 

× × × + × × × × +

× =

Eq. 6.5

Where:

CPP BASE = customer product price for baseline models, PRICE MSP = manufacturer sales price for baseline models, PCT MECH = percentage sold by air -conditioning manufacturers to direct to mechanical contractors, MU AC_WHOLES ALE

_ BASE = baseline air -conditioning equipment wholesale distributor markup, PCT AC_MECH = percentage of sales from air -conditioning equipment wholesalers to mechanical contractors, WHSLBASEINDEX = equipment wholesaler base regional cost index, MU MECH_BASE = baseline mechanical contractor markup, MECHINDEX = mechanical contractor regional cost index, PCT DISTRIB = percentage of air -conditioning equipment sold by air -conditioning wholesalers to buildings wholesale distributors, MU DIST

_ BLDG

_ BASE = baseline building distributor markup, Tax SALES = sales tax (replacement applications only), and MU OVERALL

_ BASE = baseline overall markup.

Similarly, DOE used the overall incremental markup to estimate changes in the customer product price for replacement equipment. The following equation shows how DOE used the overall incremental markup to determine the customer product price for more energy efficient models ( i.e. , models meeting new energy conservation standards).

INCR OVERALL MSP BASE SALES INCR DISTRIB DISTRIB INCR BLD DIST DISTRIB INCR WHOLESALE AC INCR MECH MECH AC INCR WHOLESALE AC MECH MSP BASE OVERALL MSP STD

MU PRICE CPP Tax

MU PCT MU PCT MU MECHINDEX MU INDEX WHSLINCR PCT MU PCT PRICE MU PRICE CPP

_ _ __ _ _ _ _ _ _ _

) ) ((

× D+=     

 

    

 

× × + × × + × × × × + × D+ × =

Eq. 6.6

Where:

CPP STD = customer product price for models meeting new energy conservation standards, PRICE MSP = manufacturer sales price for baseline models, MU OVERALL_BASE = baseline overall marku p (product of manufacturer and general contractor markup and sales tax), and

6- 19Δ PRICE MSP = change in manufacturer sales price for higher energy efficient models, PCT MECH = percentage sold by air -conditioning manufacturers direct to mechanical contractors, MU AC_WHOLESALE_INCR = incremental air -conditioning wholesale distributor markup, PCT AC

_ MECH = percentage of sales from air -conditioning equipment wholesalers to mechanical
contractors , WHSLINCRINDEX = equipment wholesaler incremental regional cost index, MU MECH_INCR = incremental mechanical contractor markup, MECHINDEX = mechanical contractor regional cost index, PCT DISTRIB = percentage of air -conditioning equipment sold by air -conditioning wholesalers to buildings wholesale distributors, MU DIST

_ BLDG

_ INCR = incremental building distributor markup, Tax SALES = sales tax, CPP BASE = customer product price for baseline models, MU OVERALL_INCR = incremental overall markup.

National average baseline and incremental markups for each market participant are summarized in Table 6.11.1

.

Table 6.11.1 Summary of National Average Overall Markups on SPVU Equipment
Baseline M arkup Incremental Markup New Construction We i ghted Average Air

- Conditioning Equipment Wholesale Distributor Markup 1.17 7 1.051
Building Manufacturer Markup , Weighted Average for Wood and Metal Prefabricated Buildings 1.467 1.3 69

Building Manufacturer Markup for Concrete Prefabricated Buildings 1.756 1.591

Building Wholesale Distributor Markup

, Weighted Average for Wood and Metal Buildings 1.2 83 * 1.2 83 *
Building Wholesale Distributor Markup, Concrete Buildings 1.539 * 1.539 *
General Contractor Markup 1.31 1 1.197 Sales Tax (National P opulation

- W eighted A verage) 1.072 1.072 Overall Markup (Weighted U.S

. Average) 2. 3 08 ** 1.94 1 ** Replacement We i ghted Average Air

- Conditioning Equipment Wholesale Distributor Markup 1.1 77 1.0 51
Mechanical Contractor Markup 1.474 1.184 Building Wholesale Distributor Markup, Weighted Average for Wood and Metal Buildings 1.283 * 1.283 *
Building Wholesale Distributor Markup, Concrete Buildings 1.539* 1.539*
Sales Tax (National Population

- Weighted Average) 1.072 1.072 Overall Markup (Weighted U.S. Average) 1. 609 ** 1.337** * The baseline markup is also being used as the incremental markup. Data available from the 2007 Economic Census did not allo w an incremental markup to be calculated. ** The actual distribution channels are complex. For example, air

- conditioning distributors are assumed to be a combination of manufacturer’s representatives and full

- service wholesalers who sell to building manufacturers. Manufacturing wholesalers sell to both contractors and to distributors. Consequently, the overall markup cannot be derived directly from the component average marku ps.

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< www.modular.org/HtmlPage.aspx?name=analysis >
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< https://thestc.com/STRates.stm >

6- 22