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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 WHOLESALER, CONTRACTOR, AND 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 MANUFACTURER SELLING PRICES 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 ............................................................................... 7-4
7-1

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 (MSPs) 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 calculation of a national population-weighted average sales tax. 

In this rulemaking, 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). DOE selected this methodology because it is difficult to reverseengineer HID lamps; 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 price 

markups 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 

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

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

difference between the company revenue and the company cost of sales or cost of goods sold 

(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 with 
7-2

the equipment and the degree of market competition. In developing wholesaler markups, DOE 

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

7.2 ESTIMATION OF WHOLESALER, CONTRACTOR, AND SALES TAX 

MARKUPS

7.2.1 Wholesaler and Contractor Markup

Publicly owned companies are required 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 

calculating 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 2011 in calculating the wholesaler markup for the 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; therefore, DOE did not estimate baseline and 

incremental markups for HID lamps. DOE needed to estimate markups 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 ballast 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 ( MUBASE ) for wholesalers as an average markup 

using the following equation: 

MUBASE = CGS + GM

CGS

Where:

MUBASE = 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. 
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Table 7.2.1 Gross Profit Margins for Electrical Wholesalers

Company Financial 

Figure*

Year

2011 2010 2009 2008 2007

A 

COGS, $ 4,379,541 3,749,736 3,522,932 4,354,935 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 2007, 2008, 2009, 2010, and 2011

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 Lamps 

Company Baseline Markup

Wholesaler A 1.24

Wholesaler B 1.23

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 state 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 state and local sales tax from the Sales Tax Clearinghouse (Table 7.2.3).2 These data 

represent 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 developed for the LCC and 

PBP analysis. The distribution ranges from a minimum of 0 percent in some states to a maximum 

of 9.45 percent in Tennessee, with a national weighted average of 7.11 percent. 
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Table 7.2.3 State and Local Sales Tax Rates 

State

Combined State

and Local Tax Rate

%

State

Combined State

and Local Tax Rate

%

State

Combined 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 PRICES 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 its 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

REFERENCES

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: Fluorescent 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>