7-i CHAPTER 7. MARKUPS ANALYSIS

TABLE OF CONTENTS

7.1 INTRODUCTION .............................................................................................................. 7-1

7.1.1 Distribution Channels ............................................................................................. 7-1

7.1.2 Markup Calculation Methodology .......................................................................... 7-1

7.2 ESTIMATION OF WHOLES ALER, CONTRACTOR, AN D SALES TAX MARKUPS 7-2

7.2.1 Wholesaler and Contractor Markup ........................................................................ 7-2

7.2.2 Sales Tax ................................................................................................................. 7-3

7.3 DERIVATION OF MANUFA CTURER SELLING PRICE S FOR HID LAMPS ............ 7-4

REFERENCES ............................................................................................................................ 7-5

LIST OF TABLES

Table 7.2.1 Gross Profit Margins for Electrical Wholesalers ...................................................... 7-3 Table 7.2.2 Calculated Electrical Wholesaler Baseline Markups for HID Lamps ...................... 7-3

Table 7.2.3 State and Local Sales Tax Rates ............................................................................... 7-47-1 CHAPTER 7 . MARKUPS ANALYSIS

7.1 INTRODUCTION

This interim technical support document (TSD) chapter describes the methodology the U.S. Department of Energy (DOE) followed in developing markups for the rulemaking analysis

for high

- intensity discharge (HID) lamps

. Markups are multipliers that relate manufacturer selling prices (MSP s ) to end

- user purchase prices, and vary with the distribution channel through which customers purchase the equipment. This chapter also describes DOE’s review of national sales tax data, and calculat ion of a national population- weighted average sales tax

.

In this rulemaki ng, DOE estimated end

- user price s for representative HID lamp designs directly, rather than develop MSPs from a bill of materials and manufacturer markup analysis ( interim TSD chapter 6). DOE selected this methodology because it is difficult to reverseengineer HID lamp s; they are not easily disassembled, and fill gas composition and partial pressures are difficult to assess. For the notice of proposed rulemaking (NOPR) stage of this rulemaking, DOE will use estimated markups to develop MSPs for HID lamps for the manufacturer impact analysis ( MIA, as described in chapter 13 of the interim TSD ).

DOE understands that an energy conservation standard that requires higher- efficacy lamps may require customers to purchase a new ballast and fixture. DOE estimated p rice

mar kups in its markups analysis to calculate end

- user prices from MSPs for HID ballasts and

fixtures as inputs to the life

- cycle cost (LCC) and payback period (PBP) analysis , and the national impact analysis (NIA) (chapters 9 and 11, respectively, of the interim TSD ). Appendix

6A of the interim TSD describes the process by which DOE developed manufacturer production

costs and MSPs for HID ballasts and fixtures.

7.1.1 Distribution Channels

The appropriate markups for determining customer equipment prices depend on the type of distribution channels through which 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. For the interim analysis, DOE assumed that an HID ballast or fixture manufacturer sells the equipment to an electrical wholesaler ( i.e. , electrical distributor), who in turn sells it to a contractor, who sells it to the end user.

7.1.2 Markup Calculation Methodology

A t each p oint in the distribution channel, companies mark up the price of the equipment to cover their business costs and profit margin. In financial statements, gross margin is the difference between the company revenue and the company cost of sales or cost of goo ds sold ( COGS ). The gross margin includes the expenses of companies in the distribution channel— including overhead costs (sales, general, and administration); research and development and interest expenses; depreciation, and taxes —and company profits. To cover costs and to contribute positively to company cash flow, the price of products must include a markup. Products command lower or higher markups, depending on company expenses associated with7-2 the equipment and the degree of market competition. In developing wholesaler markups, DOE

obtained data about th e revenue, COGS , and expenses of companies selling lighting equipment.

7.2 ESTIMATION OF WHOLES ALER, CONTRACTOR, AND SALES TAX

MARKUPS

7.2.1 Wholesaler and Contractor Markup

Publicly owned companies are requir ed by law to disclose financial information on a regular basis by filing different forms with the U.S. Securities and Exchange Commission (SEC). Filed annually, the SEC form 10-K provides a comprehensive overview of the company’s business and financial conditions. Relevant information in the 10-K reports includes the company’s revenues and direct and indirect costs. To develop the wholesaler markup, DOE used

10- K reports from publicly owned electrical wholesalers. The financial figures necessary for

calcula ting the company markup are net sales, costs of sales, and gross profit. The income

statement section of the 10

- K reports often lists these figures. DOE used averages of the financial figures spanning 2007 to 20 11 in calculat ing the wholesaler markup for t he interim analysis

.

For the equipment subject to potential energy conservation standards, markups are typically differentiated between a “baseline markup” and an “incremental markup.” The baseline markup would relate the MSP of baseline equipment to a wholesaler sales price, and the incremental markup would relate changes in the MSP of higher- efficiency equipment to changes

in the wholesaler sales price . As discussed previously, DOE estimated end- user prices for representative HID lamp designs directly; th erefore, DOE did not estimate baseline and incremental markups for HID lamps. DOE needed to estimate markup s for HID ballasts and fixtures to generate end -user prices as inputs to the LCC-PBP analysis and NIA. DOE applied baseline markups only to the balla st and fixture MSPs, because DOE does not expect the cost structure for this ancillary equipment to vary with efficacy levels for HID lamps. Therefore, incremental markups were not used to develop end-user prices for HID ballasts and fixtures.

DOE calculated the baseline markup ( BASE MU ) for wholesalers as an average markup using the following equation:

MU BASE = CGS + GM

CGS

Where:

MU BASE = baseline wholesaler markup

, CGS = wholesaler ’s cost of goods sold ($), and

GM = wholesaler’s gross margin ($)

.

Table 7.2.1 shows the calculation of the baseline wholesaler markup.7-3 Table 7.2.1 Gross Profit Margin s for Electrical Wholesalers

Company Financial Figure * Year

20 11 20 10 20 09 20 08 20 07

A COGS, $ 4,379,541 3,749,736 3,522,932 4,35 4 ,935 4,225,983

Gross Margin

, $ 995,259 866,641 854,950 1,045,219 1,032,318

Baseline Markup 1.23 1.23 1.24 1.24 1.24

Average Baseline Markup : 1.24

B COGS, $ 4,889,149 4,065,425 3,724,061 4,904,164 4,781,336

Gross Margin

, $ 1,236,569 998,437 539,893 1,206,676 1,222,116

Baseline Markup 1.25 1.25 1.14 1.25 1.26

Average Baseline Markup : 1. 23

* Unless noted, all numbers are in thousands of dollars. This table includes 200 7 , 200 8 , 200 9 , 20 10 , and 20 11

SEC 10

- K reports.

The baseline markup covers non-production costs and profit. Table 7.2.2 shows the

baseline markups using this method for electrical wholesalers

.

Table 7.2.2 Calculated Electrical Wholesaler Baseline Markups for HID Lamp s Company Baseline Markup

Wholesaler A 1.24

Wholesaler B 1.2 3 Average 1. 23

DOE then multiplied the average wholesaler baseline markup by a contractor markup of 1.13 to obtain a total baseline markup of 1.39. The contractor markup of 1.13 is consistent with previous energy conservation standard rulemakings for lighting products, including the 2011 final rule for fluorescent lamp ballasts. 1

7.2.2 Sales Tax

The sales tax represents s tate and local sales taxes applied to HID lamps, ballasts , and

fixtures

, and is a multiplicative factor that increases the end

- user cost . DOE obtained information

on s tate and local sales tax from the Sales Tax Clearinghouse ( Table 7.2.3 ). 2 These datarepresent weighted averages that include county and city rates. DOE then calculated populationweighted average tax values for each state . DOE also calculated a national population- weighted average sales tax for use in the NIA, where DOE did not use a distribution of inputs. 3

Table 7.2.3 shows the distribution of sales tax rates that DOE devel oped for the LCC and PBP analysi s. The distribution ranges from a minimum of 0 percent in some states to a maximum of 9.45 percent in T ennessee, with a national weighted average of 7.11 percent

.7-4 Table 7.2.3 State and Local Sales Tax Rates

State Co mbined State

and Local Tax Rate

% State Co mbined State

and Local Tax Rate

% State Co mbined State

and Local Tax Rate

%

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

D .C.

Florida Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas 8.25

1.45

8.15

8.35

8.20

6.40

6.35

0.00

6.00

6.65

6.90

4.40

6.05

8.10

7.00

6.85

8.05 Kentucky

Louisiana

Maine Maryland

Massachusetts Michigan

Minnesota Mississippi

Missouri

Montana

Nebraska

Nevada New Hampshire New Jersey

New Mexico

New York

North Carolina 6.00

8.75

5.00

6.00

6.25

6.00

7.20

7.00

7.25

0.00

6.00

7.85

0.00

6.95

6.60

8.45

6.85 North Dakota

Ohio

Oklahoma Oregon Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont Virginia Washington West Virginia

Wisconsin Wyoming 5.90

6.80

8.20

0.00

6.40

7.00

7.15

5.50

9.45

8.00

6.70

6.05

5.00

8.80

6.05

5.45

5.35

U.S. Average 7.11

7.3 DERIVATION OF MANUFACTURER SELLING PRICE S FOR HID LAMPS

As mentioned previously, DOE estimated end- user prices for representative HID lamp designs directly, rather than develop MSPs from a bill of materials and manufacturer markup analysis ( interim TSD chapter 6). For the NOPR stage of this rulemaking, DOE will use estimated markups to develop MSPs for HID lamps as inputs to the MIA (chapter 13 of the

interim TSD ).

DOE is considering using i ts estimated low ( i.e. , State procurement) end

- user lamp prices as the basis for deriving HID lamp MSPs for the NOPR MIA (lamp pricing is described in chapter 6 of the interim TSD). Interviewed lamp manufacturers indicated that distribution channel markups range from 10 to 50 percent, and are typically around 15 to 30 percent. DOE is considering using a markup of 1.15 to derive HID lamp MSPs from end-user prices, as this lower markup would be more representative of high-volume, lower-price equipment.7-5 REFER ENCES

1. U.S. Department of Energy– Office of Energy Efficiency and Renewable Energy. Final Rule Technical Support Document – Energy Conservation Program for Consumer Products and Certain Commercial and Industrial Equipment: Fluorescen t Lamp Ballasts (November 2011). Washington, D. C. < www1.eere.energy.gov/buildings/appliance_standards/pdfs/ flb_ecs_finalrule_tsd.pdf >

2. The Sales Tax Clearinghouse. State Aggregate Tax Rates. 2011. (Last accessed February 19, 2013 .) < http://thestc.com/STrates.stm >

3. U.S. Census Bureau. Annual Estimates of the Resident Population for the United States, Regions, States, and Puerto Rico. 2011. (Last accessed February 19, 2013 .)

< www.census.gov/popest/data/state/totals/2011/index.html >