6

- i CHAPTER 6. MARKUPS ANALYSIS

TABLE OF CONTENTS

6.1 INTRODUCTION

................................ ................................ ................................ ........... 6

- 1

6.2 DISTRIBUTION CHANNEL S

................................ ................................ ....................... 6

- 1

6.3 APPROACH FOR MANUFAC TURER MARKUP

................................ ....................... 6

- 4

6.4 APPROACH FOR WHOLESA LER AND CONTRACTOR M ARKUPS

..................... 6

- 4

6.4.1 Wholesaler Markup

................................ ................................ ................................ .......... 6

- 6

6.4.2 Mechanical and General Contractor Markups

................................ ................................ . 6

- 7

6.5 DERIVATION OF MARKUP S

................................ ................................ ...................... 6

- 8

6.5.1 Manufacturer Markup

................................ ................................ ................................ ...... 6

- 8

6.5.2 Wholesaler Markup

................................ ................................ ................................ .......... 6

- 8

6.5.3 Me chanical Contractor Markups

................................ ................................ .................... 6

- 10

6.5.3.1 Aggregate Markups for Mechanical Contractors

................................ ......... 6

- 10

6.5.3.2 Markups for Mechanical Contractors in the Replacement and New

Construction Markets

................................ ................................ ................... 6

- 11

6.5.4 General Contractor Markups

................................ ................................ .......................... 6

- 12

6.6 DERIVATION OF CENSUS REGIONS MARKUPS

................................ .................. 6

- 15

6.6.1 Estimation of Wholesaler Markups

................................ ................................ ............... 6

- 15

6.6.2 Estimation of Mechanical Contractor Markups

................................ ............................. 6

- 17

6.6.3 Estimation of General Contractor Markups

................................ ................................ ... 6

- 19

6.7 SALES TAX

................................ ................................ ................................ .................. 6

- 21

6.8 OVERALL MARKUPS

................................ ................................ ................................ . 6

- 23

LIST OF TABLES

Table 6.5.1 Manufacturer Markups by Residential Boiler Product Class

.............................. 6

- 8

Table 6.5.2 Wholesaler Expenses and Markups

................................ ................................ ..... 6

- 9

Table 6.5.3 Mechanical Contractor Expenses and Markups Based on Census Bureau

Data

................................ ................................ ................................ .................... 6

- 10

Table 6.5.4 Baseline Markup, All Mechanical Contractors

................................ .................. 6

- 11

Table 6.5.5 Baseline Markups for the Replacement and New Construction Markets,

All Mechanical Contractors

................................ ................................ ............... 6

- 12

Table 6.5.6 Markups for the Replacement and New Construction Markets

......................... 6

- 12

Table 6.5.7 Residential Building General Contractor Expenses and Markups

..................... 6

- 13

Table 6.5.8 Commercial Building General Contractor Expenses and Markups

................... 6

- 14

Table 6.6.1 Wholesaler Markups for Residential Boilers in Residential Application

.......... 6

- 16

Table 6.6.2 Regional Wholesaler Markups for Residential Boilers in Commercial Application

................................ ................................ ................................ ......... 6

- 17

Table 6.6.3 Shipment

- Weighted Mechanical Contractor Markups for Residential Boilers in Residential Application

................................ ................................ ..... 6

- 18

Table 6.6.4 Shipment

- Weighted Mechanical Contractor Markups for Residential Boilers in Commercial Application

................................ ................................ ... 6

- 196

- ii Table 6.6.5 General Contractor Markups for Residential Boilers in Residential Application

................................ ................................ ................................ ......... 6

- 20

Table 6.6.6 General Contractor Markups for Residential Boilers in Commercial Application

................................ ................................ ................................ ......... 6

- 21

Table 6.7.1 Average Sales Tax Rates by RECS Region

................................ ....................... 6

- 22

Table 6.7.2 Average Sales Tax Rates by CBECS R egion

................................ .................... 6

- 23

Table 6.8.1 Summary of Overall Markups on Residential Boilers in Residential Application

................................ ................................ ................................ ......... 6

- 24

Table 6.8.2 Summary of Overall Markups on Residential Boilers in Commercial Application

................................ ................................ ................................ ......... 6

- 25

Table 6.8.3 Summary of Total Markup by Residential Boiler Product Class

...................... 6

- 25

LIST OF FIGURES

Figure 6.2.1 Distribution Channels for Residential Boilers in Residential Application

.......... 6

- 2 Figure 6.2.2 Distribution Channels for Residential Boilers in Commercial Application

........ 6

- 36

- 1 CHAPTER 6. MARKUP ANALYSIS

6.1 INTRODUCTION

To carry out its analyses, the U.S. Department of Energy (DOE) needed to determine the cost to the consumer of baseline products and the cost of more eff icient units the consumer would purchase under new energy conservation standards. DOE calculated such costs based on engineering estimates of manufacturing costs plus appropriate markups for the various

distribution channels for residential boilers

.

For wholesalers and contractors , DOE estimated a baseline markup and an incremental markup. DOE define s a baseline markup as a multiplier that convert s the manufactur er selling price of equipment with baseline efficiency to the consumer 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 manufactur er selling price of higher efficiency equipment to the

consumer purchase price for the same equipment. Beca use companies mark up the price at each point in the distribution channel , b oth baseline and incremental markups are dependent on the

distribution channe l, as described in Section 6.2

.

Generally, companies mark up the price of a product to cover their business costs and profit margin. In financial statements, gross margin is the difference between the company revenue and the company cost of sales or cost of goods sold ( CGS ). The gross margin takes account of the expenses of companies in the distribution channel, including overhead costs (sales, general, and administration); research and development (R&D) and interest expenses; depreciation; and taxes

— and company p rofits. In order for sales of a product to contribute positively to company cash flow, the product’s markup must be greater than the corporate gross margin. Products command lower or higher markups, depending on company expenses associated with the product and the degree of market competition.

6.2 DISTRIBUTION CHANNEL S

The appropriate markups for determining consumer equipment prices depend on the type of distribution channels through which products move from manufacturers to purchasers. In the

case of resid ential boilers, the majority of them are purchased for residential use, but a small fraction of residential boilers are purchased to be install ed in small to mid

- size commercial building s . DOE estimated that 9 3 % of total residential boiler shipment s are to residential applications and 7 % to commercial application s . Hence, DOE calculated the markups separately

for both residential and commercial application of residential boilers.

Within each application, there are two primary types of markets describin g the way most product s pass from the manufacturer to the consumer, one applying to residential boilers installed in replacement markets or by new owners and the other applying to residential boiler s that are installed in new construction . In th e replaceme nt distribution channel, the manufacturer generally sells the equipment to a wholesaler, who in turn sells it to a mechanical contractor, who6

- 2 in turn sells it to the consumer. The new construction distribution channel includes an additional

link in the cha in

— the general contractor. In th e new construction distribution channel, the manufacturer sells the equipment to a wholesaler, who in turn sells it to a mechanical contractor, who in turn sells it to a general contractor then to the consumer

.

Figure 6.2.1 illustrates the two main distribution channels for residential boilers in the residential application

.

Replacement and New Owner :

New Construction:

Figure 6.2.1 Distribution Channels for Residential Boiler s in Residential Application

For residential boilers in the commercial application, DOE considers an additional

distribution channel for which the manufacturer sells the equipment to the wholesaler and then to

the consumer through a national account unde r both replacement and new construction market s

. This national account distribution channel is applicable to small to mid

- size commercial building s where the on

- site staff or internal personnel generally purchase equipment from wholesalers at much lower pr ices due to the large volume purchased and perform the installation themselves. Occasionally, the equipment manufacturers and wholesalers can be the same entity, so the consumer selling price could potentially be even lower than the usual national account channel. However, DOE does not have sufficient information to determine the appropriate markup for this particular distribution channel.

Figure 6.2.2 shows the main distribution channels for residential boilers in the commercial application. Manufacturer Wholesaler Mechanical

Contractor Consumer

Wholesaler Mechanical

Contractor General

Contractor Consumer Manufacturer6

- 3 Replacement:

New Construction:

Figure 6.2.2 Distribution Channels for Residential Boilers in Commercial Application

Based on information provided from manufacturer interview s , there is a nother possible

distribution channel which includes retail store instead of wholesaler. In this case

, the manufacturer sells the equipment to a retailer , who in turn sells it to a mechanical contractor,

who in turn sells it to the consumer. However, DOE does not have enough information at this point to make a separate markup estimation for this distribution channel. DOE would assume that the retailer markup is similar to the wholesaler markup. DOE is also aware that there may be

two additiona l distribution channels for residential boilers : (1) online distribution where manufacturers sell the products to online retailers who in turn sell them directly to consumers

, and (2) rebranding distribution channel where wholesalers or retailers negotiate good pricing from the boiler manufacturer based on high volumes and have the product customized to carry

their name

, and then send it through their normal distribution channel to the contractors

. The

former one mainly applies to th e do

- it

- yourself (DIY) i nstallation representing around two percent of the total HVAC shipments

, which implies an even smaller fraction of the total residential boiler shipments

. For the la t ter one, DOE assumes that it would have the same overall markups as the conventional distr ibution channels. Although manufacturers may have lower margin, wholesalers and retailers would redistribute the profit throughout the distribution channel to have the final retail price comparable with products sold through conventional Manufacturer Wholesaler Mechanical

Contractor Consumer

Wholesaler Mechanical

Contractor General

Contractor Consumer Manufacturer Manufacturer Wholesaler Consumer

Manufacturer Wholesaler Consumer National Account

National Account6

- 4 distribution chann els. Du e to the reasons mentioned above, DOE did not consider them in this analysis.

6.3 APPROACH FOR MANUFACTURER MARKUP

DOE uses manufacturer markups to transform a manufacturer’s product cost into a manufacturer sales price. Using the CGS and gross marg in (GM) , the manufacturer markup can

be calculated as follows:

MFG MFG MFG

MFG CGS GM CGS MU +

=

Eq. 6.3

. 1

Where:

MU MFG = m anufacturer markup,

CGS MFG = m anufacturer cost of goods sold, and

GM MFG = m anufacturer gross margin.

The manufacturer’s CGS (or manufacturer pr oduction cost ( MPC ) ) plus its GM equals the manufacturer selling price ( MSP ).

6.4 APPROACH FOR WHOLESALER AND CONTR ACTOR MARKUPS

DOE examined the manner in which wholesaler and contractor markups may change in response to changes in residential boiler efficiency levels and other factors. Using the available data, DOE estimated that there are differences between incremental markups on incremental equipment costs of higher efficiency products and the baseline markup on direct business costs of products wi th baseline efficiency

.

DOE derived the wholesaler and contractor markups from three key assumptions about

the costs associated with residential boilers . DOE based the wholesaler and mechanical contractor markups on firm

- level income statement data, and based the general contractor markups on U.S. Census Bureau data for the residential building construction industry. DOE obtained the firm income statements from the Heating, Air

- conditioning & Refrigeration Distributors International (HARDI) 2012 Profit R eport and from the Air Conditioning
Contractors of America (ACCA) 2005 Financial Analysis. 1

, 2 HARDI and ACCA are trade associations representing wholesalers and mechanical contractors, respectively. DOE used the financial data from the 2007 U.S. Census of Business for developing general contractor markups

in the same form as the income statement data for wholesalers and mechanical contractors. These income statements break down the components of all costs incurred by firms that supply and6

- 5 install heating and air

- conditioning equipment. a The key assumptions used to esti mate markups using these financial data are:

1. The firm income statements faithfully represent the various average costs incurred by firms distributing and installing residential boiler s

.

2. These costs can be divided into two categories: 1) costs that vary i n proportion to the

MSP of residential boiler s (variant costs ); and 2) costs that do not vary with the MSP of

residential boiler s (invariant costs).

3. Overall

, wholesale and contractor prices for residential boiler s vary in proportion to the

wholesale r and contractor costs for residential boiler s included in the income statements.

In support of the first assumption, the income statements itemize firm costs into 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 and contractors tend to handle multiple commodity lines, including room air conditioners, furnaces, central air conditioners and heat pumps , and boil ers, the data provide the most accurate available indication

of the expenses associated with residential boiler s

.

Information obtained from the trade literature, selected HVAC wholesalers, contractors, and consultants tends to support the second assumpti on

. T his information indicates that wholesale and contractor markups vary according to the quantity of labor and materials used to distribute and install appliances

. In the following discussion, DOE assumes a division of costs

between those that do not sca le with the manufacturer price (labor and occupancy expenses) and those that do (operating expenses and profit).

In support of the third assumption, the HVAC wholesaler and contractor industry is competitive, and consumer demand for heating and air condit ioning 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 firms listed in the 2007 Census indicates the competitive nature of the market.
For example, there are more than 700 HVAC manufacturers, 3 5,300 wholesalers of heat pumps

and air

- conditioning equipment, 4 more than 170,000 general residential contractors, 36,000
commercial and institutional building contractors, 5 and 91,000 HVAC contractors 6 listed in the 2007 Census. Following standard economic theory, competitive firms facing inelastic demand

either s et prices in line with costs or quickly go out of business. 7

DOE concluded that markups for more efficient equipment are un likely to be proportional to all direct costs. When the wholesaler’s purchase price of equipment increases, for example, only a fraction of a business’ expenses increases, while th e remainder may stay relatively constant. For example, if the unit price of a residential boiler unit increases by 30 percent due to improved efficiency, it is unlikely that the cost of secretarial support in an

a Wholesaler s and mechanical contractors to which these reports refer handle multiple commodity lines.6

- 6 administrative office will increase by 30 pe rcent also. Therefore, DOE assumed that i ncremental markups cover only those costs that scale with a change in the MSP (variant costs ).

6.4.1 Wholesaler Markup

Using the above assumptions, DOE developed baseline and incremental markups for wholesalers using th e firm income statement from the HARDI 2012 Profit Report ( a ppendix 6

- A. 1 ). The baseline markups cover all of the wholesaler’s costs ( both invariant costs and variant

costs ). Here

, variant costs were defined as costs that likely vary in proportion to the change in MSP induced by increased efficiency standards; in contrast, invariant costs were defined as costs that are unlikely to vary in proportion to the change in MSP due to incre ased efficiency

standards. DOE calculated the baseline markup for wholesalers using the following equation:

WHOLE WHOLE WHOLE WHOLE

WHOLE WHOLE WHOLE

BASE CGS VC IVC CGS

CGS GM CGS MU ) ( + +

= +

=

Eq. 6.4.1 .1

Where:

MU BASE = b aseline wholesaler markup,

CGS WHOLE = w holesaler cost of goods sold,

GM WHOLE = w holesaler gross margin,

IVC WHOLE = w holesaler invariant costs, and

VC WHOLE = w holesaler variant costs.

Incremental markups are coefficients that relate the change in the MSP of more energy

efficient models , or those products that meet the requirements of new energy conservation

standards

, to the change in the wholesaler sales price. Incremental markups cove r only those costs that scale with a change in the MSP (variant costs, VC ). DOE calculated the incremental markup ( MU INCR ) for wholesalers using the following equation:

WHOLE WHOLE WHOLE

INCR CGS VC CGS MU +

=

Eq. 6.4.1

. 2

Where:

MU INCR = i ncremental wholesaler markup,

CGS WHOLE = w holesaler cost of goods sold, and

VC WHOLE = w holesaler variant costs.6

- 7 6.4.2 Mechanical and General Contractor Markup s

The type of financial data used to estimate markups for wholesalers is also available for mechanical contractors and general contractors from the 2007 Economic Census and ACCA 2005 Financial Analysis. To estimate mechanical contractor markups fo r residential boilers

, DOE collected financial data from the Plumbing and HVAC Contractors (NAICS 23822) series from the 2007 Economic Census and from ACCA 2005 Financial Analysis. To estimate general contractor markups for residential boilers in residenti al application s , DOE collected data from the Residential Building Construction series from the 2007 Economic Census, which is the aggregation of New Single

- Family General Contractors (NAICS 236115), New M ultifamily

H

ousing C onstruction (NAICS 236116), New H ousing O perative B uilders (NAICS 236117), and

Residential R emodelers (NAICS 236118). To estimate general contractor markups for residential boilers in commercial application s , DOE collected data from the Commercial Building Construction series (NAICS 2362 20) from the 2007 Economic Census. ACCA financial data provide GM as percent of sales for the mechanical contractor industry; therefore, the baseline markup can be derived with the following equation:



### (%) (%) (%)

GM Sales Sales MU BASE



### − =

Eq. 6 .4.2

. 1

The U.S. Census data include the number of establishments, payroll for construction workers, value of construction, cost of materials, and cost of subcontracted work at both state and national levels. DOE calculated the baseline markup for mechanical contractors and general contractors using the following equation:



### SubCost MatCost Pay V MU CONSTRUCT

BASE 

### + + =

Eq. 6.4.2

. 2

Where:

BASE MU = baseline mechanical contractor or general contractor markup,

CONSTRUCT V = value of construction,



### Pay = payroll for constructi on workers,

MatCost = cost of materials, and

SubCost = cost of subcontracted work.

Analogously, DOE estimated the incremental mechanical contractor and general contractor markups by only marking up those costs that scale with a change in the MSP (variant

costs

, V C

) for more energy

- efficient products. As stated above, DOE assumes a division of costs between those that do not scale with the manufacturer price (labor and occupancy expenses), and those that do (other operating expe nses and profit). Hence, DOE categorized the Census cost data in each major cost category and estimated markups using the following equation:6

- 8 CONT CONT CONT

INCR CGS VC CGS MU +

=

Eq. 6.4.2

. 3

Where:

MU INCR = incremental contractor markup,

CGS CONT = contractor cost of goods sold, and

VC CONT = c ontractor variant costs.

6.5 DERIVATION OF MARKUP S

6.5.1 Manufacturer Markup

The methodology DOE used to determine manufacturer markup for residential boilers is

similar to the methodology described in chapter 5 of the Residential Furnace and Central Air

Conditioning products D irect F inal R ule technical support document (TSD). b DOE used U.S. Security and Exchange Commission (SEC) 10

- K report s covering the period from 2008 to 2012 from publicly owned residential boiler manufacturing companies to estimate manufacturer markups. Table 6.5.1 presen ts manufacturer markups for the six different product classes considered in this analysis.

Table 6.5.1 Manufacturer Markups by Residential B oiler Product Class

Product Class Baseline Markup

Gas

- Fired Hot Water Boiler 1. 41

Gas

- Fired Steam Boiler 1.41

Oil

- Fired Hot Water Boiler 1.41

Oil

- Fired Steam Boiler 1.41

Electric Hot Water Boiler 1.41

Electric Steam Boiler 1.41

6.5.2 Wholesaler Markup

Wholesalers reported median data in a confidential survey that HARDI conducted of

member firms. In the survey, HARDI itemized revenues and costs into cost categories, including direct equipment expenses (cost of goods sold ), labor expenses, occupancy expen ses, other operating expenses, and profit. DOE presents these data in full in a ppendix 6

- A.1. Table 6.5.2

summarizes them as cost

- per

- dollar sales revenue in the f irst data column. These wholesaler markups are applicable to residential boilers in both residential and commercial application s

.

b The TSD for the direct final rule for HVAC products is available at the following website: http://www1.eere.energy.gov/buildings/appliance_standards/residential/pdfs/hvac_ch_05_engineering_2011

- 04

- 22.pdf6

- 9 Table 6.5.2 Wholesaler Expenses and Markups

Descriptions Per Dollar

Sales Revenue
$ Per Dollar Cost

of Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.737 1.

000
Labor Expenses: Salaries and benefits 0.151 0.205 Occupancy Expense: Rent, maintenance, and utilities 0.036 0.049 Other Operating Expenses: Depreciation, advertising, and

insurance. 0.055 0.075

Operating Profit 0.021 0.028
Wholesaler Baseline Markup ( MU WHOLE BASE ) 1.357 Incremental Markup ( MU WHOLE INCR ) 1.103

Source: Heating, Air Conditioning & Refrigeration Distributors International. 2012. 2012 Profit Report (2011 Data).

In this case, direct equipment expenses (cost of goods sold) represent about $0.7 4 per dollar sales revenue, so for every $1 wholesalers take in as sales revenue, $0.7 4 is used to pay the direct equipment costs. Labor expenses represent $0.1 5 per dollar sales revenue, occupancy expenses represent $0.04, other operating expenses represent $0.0 6 , and profit accounts for $0.0 2 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 fi rst data column by $0.7 4 ( 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 allocates $0. 205 to cover labor costs, $0.0 49 to cover occupancy

exp enses, $0.07 5 for other operating expenses, and $0.0 28 in profits. This totals to $1.3 57 in sales revenue earned for every $1.00 spent on equipment costs. Therefore, the wholesaler baseline markup ( MU WHOLE BASE ) is 1.3 57 ($1.3 57 ÷ $1.00).

DOE also used the data in column two to estimate the incremental markup. The incremental markup depends on which of the costs in Table 6.5.2 are variant and which a re 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 $1.36 0 , implying that the incremental markup is 1.36 0 , or the same as t he 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. 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 wholesale price will increase to match changes in ”other” operating costs and operating profit of $0.0 76 , which when divided by 73. 7 cents in cost of goods sold yields an increase of $0. 103 , giving a wholesaler incremental markup ( MU WHOLE INCR ) of 1. 103

. See a ppendix 6

- A.1 for cost details.6

- 10 6.5.3 Mechanical Contractor Markups

6.5.3.1 Aggregate Markups for Mechanical C ontractors

The 2007 Economic Census provides Geographic Area Series for the Plumbing and

HVAC Contractors (NAICS 23822) sector, which contains national average sale s and cost data

, including value of construction, cost of subcontract work, cost of materials, and payroll for construction workers. It also provides the cost breakdown of gross margin, including labor

expenses, occupancy expenses, other operating expenses, and profit. The gross margin provided by the U.S. Censu s is disaggregated enough that DOE was able to determine the invariant (labor and occupancy expenses) and variant (other operating expenses and profits) costs for this particular sector. By using the equation mentioned above, baseline and incremental marku ps were estimated. The markup results are presented in Table 6.5.3

. ( A ppendix 6

- A.2 contains the full set of data.)

Table 6.5.3 Mechanical Contractor Expenses and Markups Based on Census Bureau

Data

Description Mechanical Contractor Expenses

or Revenue

Per Dollar

Sa les Revenue
$ Per Dollar

Cost of Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.68 1.00
Labor Expenses: Salaries (indirect) and benefits 0.18 0.26 Occupancy Expense: Rent, maintenance, and utilities 0.02 0.03 Other Operating Expenses: Depreciation, advertising,

and insurance. 0.08 0.12

Net Profit Before Taxes 0.04 0.06 Baseline Markup ( MUMECH BASE ): Revenue per dollar cost of goods 1.48 Incremental Markup ( MUMECH INCR ): Increased revenue per dollar increase in cost of goods sold 1.18

Source: U.S. Census Bureau. 2007. Plumbing, Heating, and Air

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

The first data column in Table 6. 5.3 provides the cost of goods sold and a list of gross margin components as expenses per dollar of sales revenue. As shown in the table, the direct cost of sales represents about $0.68 per dollar sales revenue to the mechanical contractor, and the gross margin totals $0.32 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. 68. 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 $0.48 to cover the other costs. This totals $1.48 in sales revenue earned for every $1.00 spent on equipment costs. This is equivalent to a baseline markup ( MU MECH CONT BASE ) of 1.48 for mechanical contractors.

DOE was also able to use the data in column two in Table 6.5.3 to estimate the incremental markups, after classifying the costs as either invariant or variant. At one extreme, if6

- 11 all of the other costs scale with the equipment price ( i.e., all costs are variant), the increase in general contractor price will be $1.48, implying that the incremental markup is 1. 48 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 general contrac tor price, for an incremental markup of 1.0. DOE believe s the labor and occupancy costs are invariant and the other operating costs and profit scale with the equipment price ( i.e., are variant). In this case, for a $1.00 increase in the equipment price, th e general contractor price will increase by $1. 18

, giving a general contractor incremental markup ( MU MECH CONT INCR ) of 1. 18

.

6.5.3.2 Markups for Mechanical Contractors in the Replacement and New

Construction Markets

DOE derived the baseline and incremental markups for both replacement and new
construction markets using the 2007 Economic Census industrial cost data 8 supplemented with

the most recent ACCA 2005 f inancial data. 1 The 2007 Economic Census provides sufficient

detailed cost breakdown for the Plumbing and HVAC Contractor s (NAICS 23822) sector so that DOE was able to estimate baseline and incremental markups for mechanical contractors. However, the 2007 Economic Census does not separate the mechanical contractor market into replacement and new construction markets. In orde r to calculate markups for these two markets, DOE utilized 2005 ACCA financial data, which reports gross margin data for the entire mechanical contractor market and for both the replacement and new construction markets.

The HVAC contractors, defined here as mechanical contractors, reported median cost data in an ACCA 2005 financial analysis of the HVAC industry. These data are shown in Table

6.5.4

.

Table 6.5.4 Baseline Markup , All Mechanical Contractors

Description Contractor Expenses or Revenue

Per Dollar

Sales Revenue
$ Per Dollar

Cost of Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.73 1.00 Gross Margin: Labor, occupancy, operating expenses, and profit 0.27 0.37

Revenue: Baseline revenue earned per dollar cost of goods 1.37 Baseline Markup ( MU MECH CONT BASE ) 1.37

Source: Air Conditioning Contractors of America. 2005. Financial Analysis for the HVACR Contracting Industry.

Table 6.5.5 summarizes the gross margin and resulting baseline markup data for all mechanical contractors that serve the replacement and new construction markets

.6

- 12 Table 6.5.5 Baseline Markups for the Rep lacement and New Construction Markets, All

Mechanical Contractors

Description Contractor Expenses or Revenue by Market Type
Replacement New Construction

Per Dollar

Sales

Revenue
$ Per Dollar

Cost of

Goods
$ Per Dollar

Sales

Revenue
$ Per Dollar

Cost of

Goods
$
Direct Cost of Equipment Sales: Cost of goods sold 0.703 1.000 0.745 1.000

Gross Margin: Labor, occupancy, operating expenses, and profit 0.297 0.422 0.255 0.342

Baseline Markup ( MUMECH

CONT BASE ): Revenue per dollar cost of goods NA 1.42 NA 1.34

% Difference from Aggregate

Mechanical Contractor Baseline

MU NA 3.6% NA

- 2.2%

Source: Air Conditioning Contractors of America. 2005. Financial Analysis for the HVACR Contracting Industry.

Using the baseline markup data from Table 6.5.5 and results from Table 6.5.4

, DOE calculated that the baseline markups for the replacement and new construction markets are 3.6 percent higher and 2. 2 percent lower, respectively, than for all mechanical contractors serv ing all

markets

.

The markup deviations ( i.e., 3.6 percent higher and 2. 2 percent lower for the replacement and new construction markets, respectively) derived for all mechanical contractors were then applied to the baseline markup of 1.48 and the incremen tal markup of 1.18 estimated for the Plumbing and HVAC Contractors (NAICS 23822) sector in Table 6.5.3 . DOE assumed that this deviation applies equally to the basel ine and incremental markups calculated from the 2007 Economic Census. The results of the baseline and incremental markups for the replacement and new construction markets served by mechanical contractors are shown in Table 6.5.6

.

Table 6.5.6 Markups for the Replacement and New Construction Markets Baseline Markup Incremental Markup Replacement Market 1.53 1.22

New Construction Market 1.45 1.15

6.5.4 General Contractor Markups

DOE derived markups for general contractors from U.S. Census Bureau data for the residential building construction and commercial building construction sector to reflect the
residential and commercial application of residential boilers

. 9 The residential construction sector includes establishments primarily engaged in construction work, including new construction6

- 13 work, additions, a lterations, and repairs of residential buildings, whereas the commercial

construction sector includes establishments primarily responsible for the construction of
commercial and institutional buildings

. 10 The U.S. Census Bureau data for the construction sector include detailed statistics for establishments with payrolls, similar to the data reported by HARDI for wholesalers. The primary difference is that 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 assumed that the

total dollar values that the U. S. Census Bureau reported, once converted to a percentage basis, represent revenues and expenses for an average or typical contracting business. Similar to the

data for wholesalers

, Table 6.5.7 summarizes the expenses for general contractors in residential building construction as expenses per dollar sales revenue in the first data column . ( Table 6

- A.3.1 in a ppendix 6

- A.3 contains the full set of data.)

Table 6.5.7 Residential Building General Contractor Expenses and Markups

Description General Contractor Expenses

or Revenue

Per Dollar

Sales Revenue
$ Per Dollar

Cost of

Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.68 1.00
Labor Expenses: Salaries (indirect) and benefits 0.08 0.12 Occupancy Expense: Rent, maintenance, and utilities 0.01 0.01 Other Operating Expenses: Depreciation, advertising, and

insurance. 0.06 0.09

Net Profit Before Taxes 0.17 0.25 Baseline Markup ( MUGEN CONT BASE ): Revenue per dollar cost of goods 1.47 Incremental Markup ( MUGEN CONT INCR ): Increased revenue per dollar increase in cost of goods sold 1.34

Source: U.S. Census Bureau. 2007. Residential Building Construction. Sector 23: 236115

- 236118. Construction: Industry Series: Preliminary Detailed Statistics for Establishments: 2007.

As shown in the first column , the direct cost of sales represents about $0.68 per dollar sales revenue to the general contractor. Labor expenses represent $0.08 per dollar sales rev enue, occupancy expenses represent $0.01 per dollar sales revenue, other operating expenses represent $0.03, and profit makes up $0.20 per dollar sales revenue.

DOE converted these expenses per dollar sales into revenue per dollar cost of goods sold, by di viding each figure in the first data column by $0.68. 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, $0.12 to cover labor costs, $0.01 to cover occupancy expenses, $0.09 for other operating expenses, and $0.25 in profits. This totals to $1.47 in sales revenue earned for every $1.00 spent on equipment costs. Thus, the general contractor baseline markup ( MU GEN CONT BASE ) is 1.4 7.6

- 14 DOE was also able to use the data in column two in Table 6.5.7 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 $1.4 7 , implying that the incremental markup is 1. 48, or the same as the baseline markup. At the other e xtreme, 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 general contractor price, for an incremental markup of 1.0. DOE believe s the labor and occupancy costs are invariant and the

o ther operating costs and profit scale with the equipment price ( i.e., are variant). In this case, for a $1.00 increase in the equipment price, the general contractor price will increase by $1.3 4

, giving a general contractor incremental markup ( MU GEN CONT I NCR ) of 1.3 4

.

Table 6.5.8 summarizes the expenses for general contractors in commercial building

construction as expenses per dollar sales revenue in the first data column

. ( Table 6

- A.3.2 in

a

ppendix 6

- A.3 contains the full set of data.)

Table 6.5.8 Commercial Building General Contractor Expenses and Markups

Description Wholesale Firm Expenses or

Revenue

Per Dollar

Sales Revenue
$ Per Dollar

Cost of

Goods
$ Direct Cost of Equipment Sales: Cost of goods sold 0.76 1
Labor Expenses: Salaries (indirect) and benefits 0.08 0.10 Occupancy Expense: Rent, maintenance, and utilities 0.01 0.01 Other Operating Expenses: Depreciation, advertising, and

insurance. 0.03 0.04

Net Profit Before Taxes 0.12 0.15 Baseline Markup ( MUGEN CONT BASE ): Revenue per dollar cost of goods 1.31 Incremental Markup ( MUGEN CONT INCR ): Increased revenue per dollar increase cost of goods sold 1.19

Source: U.S. Census Bureau. 2007. Sector 236220 (Commercial Building Construction). Construction: Industry Series: Preliminary Detailed Statistics for Establishments: 2007.

As shown in the first column , the direct cost of sales represents about $0.7 6 per dollar sales revenue to the general contractor. Labor expenses represent $0.0 8 per dollar sales revenue, occupancy expenses represent $0.01 per dollar sales revenue, other operating expenses represent $0.03, and profit makes up $0.1 2 per dollar sales revenue.

DOE converted these expenses pe r dollar sales into revenue per dollar cost of goods sold, by dividing each figure in the first data column by $0.76. 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, $0.10 to cover labor costs, $0.01 to cover occupancy expenses, $0.04 for other operating expenses, and $0.15 in profits. This totals to $1.31 in sales revenue earned for every $1.00 spent on equipment costs. Thus, the general contractor baseline markup ( MU GCONTRACT_ BASE ) is 1.31.6

- 15 DOE was also able to use the data in column two of Table 6.5.8 to estimate the

incremental mar kups, 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 $1.48, implying that the incremental markup is 1.48, 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 general contractor price, for an incremental markup of 1.0. DOE believes the labor and occupancy costs are invariant, while the other operating costs and profit to scale with the equipment price ( i.e., are variant). In this case, for a $1.00 increase in the equipment price, the general contractor price will increas e by
$1. 19 , giving a general contractor incremental markup ( MU GCONTRACT_INCR ) of 1. 19

.

6.6 DERIVATION OF CENSUS REGIONS MARKUPS

In this analysis, DOE considered six different residential boiler product classes. DOE

assumed a market saturation rate for each product class that varies by geographical region
defined by Residential Energy Consumption Survey (RECS) 11 and Commercial Building Energy
Consumption Survey (CBECS)

, 12 based on the shipment s forecasts for the year 20 20 . Therefore

, regional markups were calculated for each residential boiler product class in both residential and commercial application

.

Wholesalers and mechanical and general contractors in the residential boiler indust r y were divided into the 30 regions c provided by the latest RECS for the residential application

and also were divided int o the nine regions provided by the latest CBE C S for the commercial application . Regional baseline and incremental markups were derived using the region/state

level data from the 2012 HARDI Profit Report and the 2007 Economic Census.

6.6.1 Estimation of Wholesal er Markups

Based on the regional income statement from the 2012 HARDI Profit Report, DOE estimated baseline and incremental markups for the seven HARDI regions (Northeastern, Mid

Atlantic, Southwestern, Great Lakes, Central, Southwestern, and Western) usi ng the methodology shown in Table 6.5.2 . Next, each state in each region was assigned the HARDI regional baseline and incremental markups for the region to which it belongs. Th en
, DOE assigned all states to one of the 30 RECS reg ions used in the analysis and then calculated shipment

- weighted baseline and incremental markup averages for each region in residential application . The r esults are summarized in Table 6.6.1

.

c RECS 2009 provi des 27 regions (also called reportable domains). The 27 th region originally includes Oregon, Washington , Alaska, and Hawaii. Alaska and Hawaii are subdivided into separate regions (28 and 29, respectively), based on cooling and heating degree days. In ad dition, region 14 originally includes West Virginia, which has been disaggregated into region 30 based on coolin g and heating degree days. See appendix 7

- A for more details.6

- 16 Table 6.6.1 Wholesaler Markups for Residential Boilers in Residential Application

RECS Regions State(s) Baseline

MU Incremental

MU

1 Connecticut, Maine, New Hampshire, Rhode Island, Vermont 1.366 1.081

2 Massachusetts 1.366 1.081

3 New York 1.366 1.081

4 New Jersey 1.351 1.105

5 Pennsylvania 1.354 1.102

6 Illinois 1.362 1.099

7 Indiana, Ohio 1.357 1.099

8 Michigan 1.357 1.099

9 Wisconsin 1.362 1.099

10 Iowa, Minnesota, North Dakota, South Dakota 1.362 1.099

11 Kansas, Nebraska 1.362 1.099

12 Missouri 1.362 1.099

13 Virginia 1.351 1.105

14 Delaware, District of Columbia, Maryland 1.351 1.105

15 Georgia 1.340 1.106

16 North Carolina, South Carolina 1.340 1.106

17 Florida 1.340 1.106

18 Alabama, Kentucky, Mississippi 1.345 1.104

19 Tennessee 1.340 1.106

20 Arkansas, Louisiana, Oklahoma 1.348 1.119

21 Texas 1.348 1.119

22 Colorado 1.362 1.099

23 Idaho, Montana, Utah, Wyoming 1.411 1.113

24 Arizona 1.416 1.115

25 Nevada, New Mexico 1.353 1.118

26 California 1.416 1.115

27 Oregon, Washington 1.416 1.115

28 Alaska 1.416 1.115

29 Hawaii 1.416 1.115

30 West Virginia 1.357 1.099

In commercial application, DOE assigned all states to one of the nine CBECS regions used in the analysis and then calculated shipment

- weighted baseline and incremental markup averages for each region. The r esults are summarized in Table 6.6.2

.6

- 17 Table 6.6.2 Regional Wholesaler Markups for Residential Boilers i n Commercial Application

CBECS Regions Census Divisions Baseline

MU Incremental

MU

1 New England 1.366 1.081

2 Middle Atlantic 1.360 1.091

3 East North Central 1.360 1.099

4 West North Central 1.362 1.099

5 South Atlantic 1.351 1.105

6 East South Central 1.344 1.104

7 West South Central 1.348 1.119

8 Mountain 1.372 1.106

9 Pacific 1.416 1.115

6.6.2 Estimation of Mechanical Contractor Markups

The 2007 Economic Census provides Geographic Area Series for the Plumbing and

HVAC Contractors (NAICS 23822) sector, which contains state

- level sale and cost data

, including value of construction, cost of subcontract work, cost of materials, and payroll for construction workers. By using the equation mentioned in Section 6. 4.2

. DOE was able to estimate baseline markups for each state. Because the Census does not provide more disaggregated cost data, DOE was not able to differentiate between invariant and variant cost

.

Alternatively, DOE calculated the national baseline and incremental markups ( Table

6.6.3 ) and found that the incremental markup is around 20 percent lower than the baseline markups. DOE further derived the state

- level incremental markups by applying this ratio to the baseline markup in each state, assuming that this deviation applies equally to all states. ( Table 6

- A.4.1 in a ppendix 6

- A.4 contains the full set of data .)

In order to estimate the baseline and incremental markups for both replacement and new construction markets for each state, DOE applied the markup deviations ( i.e., 3.6 percent higher

and 2. 2 percent lower for the replacement and new co nstruction markets, respectively) derived in

Section 6.5.3.2 to the statewide baseline and incremental markups. DOE assumed that this deviation of replacement and n ew construction markets applies equally to the baseline and incremental markups.

Lastly, DOE divided all states among the 30 RECS regions and then calculated shipment

weighted average baseline and incremental markups for mechanical contractors for each region in residential application , as shown in Table 6.6.3

.6

- 18 Table 6.6.3 Shipment

- Weighted Mechanical Contractor Markups for Residential Boilers in Residential Application

In commercial application, DOE divided all states among the nine CBECS regions and

then calculated shipment

- weighted average baseline and incremental markups for mechanical

contractors for each region , as shown in Table 6.6.4

. RECS Region s State(s) Replacement

Baseline MU Replacement

Incremental

MU New

Construction

Baseline MU New

Construction

Incremental

MU

1 Connecticut, Maine, New Hampshire, Rhode Island, Vermont 1.551 1.241 1.443 1.154

2 Massachusetts 1.538 1.231 1.431 1.145

3 New York 1.600 1.280 1.488 1.191

4 New Jersey 1.583 1.267 1.473 1.178

5 Pennsylvania 1.479 1.183 1.375 1.100

6 Illinois 1.577 1.262 1.467 1.173

7 Indiana, Ohio 1.557 1.245 1.448 1.158

8 Michigan 1.530 1.224 1.423 1.138

9 Wisconsin 1.510 1.208 1.404 1.123

10 Iowa, Minnesota, North Dakota,

South Dakota 1.522 1.218 1.416 1.133

11 Kansas, Nebraska 1.437 1.149 1.336 1.069

12 Missouri 1.479 1.183 1.376 1.101

13 Virginia 1.557 1.246 1.448 1.158

14 Delaware, District of Columbia, Maryland 1.488 1.190 1.384 1.107

15 Georgia 1.474 1.179 1.371 1.096

16 North Carolina, South Carolina 1.481 1.184 1.377 1.102

17 Florida 1.512 1.210 1.407 1.125

18 Alabama, Kentucky, Mississippi 1.561 1.248 1.451 1.161

19 Tennessee 1.477 1.182 1.374 1.099

20 Arkansas, Louisiana, Oklahoma 1.570 1.256 1.460 1.168

21 Texas 1.498 1.198 1.393 1.115

22 Colorado 1.531 1.225 1.424 1.139

23 Idaho, Montana, Utah, Wyoming 1.473 1.178 1.370 1.096

24 Arizona 1.580 1.264 1.470 1.176

25 Nevada, New Mexico 1.553 1.242 1.444 1.155

26 California 1.607 1.286 1.495 1.196

27 Oregon, Washington 1.573 1.258 1.463 1.170

28 Alaska 1.766 1.413 1.642 1.314

29 Hawaii 1.835 1.468 1.707 1.366

30 West Virginia 1.528 1.222 1.421 1.1376

- 19 Table 6.6.4 Shipment

- Weighted Mechanical Contractor Markups for Residential Boilers in Commercial Application

6.6.3 Estimation of General Contractor Markups

In order to derive regional general contractor markups for the residential building construction sector from the 2007 Economic Census, DOE combined four Geographic Area Series: (1) New Single

- Family General Contractors (NAICS 236115), (2) New M ultifamily

H

ousing C onstruction (NAICS 2 36116), (3) New H ousing O perative B uilders (NAICS 236117), and (4) Residential R emodelers (NAICS 236118)

. Similarly, DOE used the Commercial Building Construction series (NAICS 236220) from the 2007 Economic Census to derive regional general contractor mar kups for the commercial application of residential boilers.

Each series consist s of statewide cost data required to calculate baseline markups for each

state

, as illustrated in Section 6.4.2

. Although there is only a new construction (no replacement) channel for general contractors, the same technique shown for mechanical contractors can still be employed to estimate regional bas eline and incremental markups. First, DOE estimated the statewide incremental markups by applying the ratio of national baseline and incremental markups ( i.e.

, the national incremental markup is around 8.84 and 9.16 percent lower than the

national baseline markup in residential and commercial application, respectively ) to the baseline markups for each state

. Lastly, DOE divided all states among the 30 RECS regions and nine CBECS regions; then calculated shipment

- weighted average baseline and incremental mar kups for general contractors for each region in both residential and commercial application

. The final

results are summarized in Table 6.6.5 for residential applica tion Table 6.6.6 for commercial application ( Table 6

- A.4.2 and Table 6

- A.4.3 in a ppendix 6

- A.4 contains the full set of data.) CB ECS Region s Census Divisions Replacement

Baseline MU Replacement

Incremental

MU New

Construction

Baseline MU New

Construction

Incremental

MU

1 New England 1.546 1.237 1.438 1.150

2 Middle Atlantic 1.570 1.256 1.460 1.168

3 East North Central 1.547 1.238 1.439 1.151

4 West North Central 1.517 1.213 1.411 1.128

5 South Atlantic 1.504 1.203 1.399 1.119

6 East South Central 1.518 1.214 1.411 1.129

7 West South Central 1.539 1.231 1.432 1.145

8 Mountain 1.519 1.215 1.413 1.130

9 Pacific 1.598 1.278 1.486 1.1896

- 20 Table 6.6.5 General Contractor Markups for Residential Boiler s in Residential Application

RECS Region s State(s) Baseline

MU Incremental

MU

1 Connecticut, Maine, New Hampshire, Rhode Island, Vermont 1.363 1.241

2 Massachusetts 1.343 1.222

3 New York 1.393 1.267

4 New Jersey 1.503 1.368

5 Pennsylvania 1.362 1.239

6 Illinois 1.589 1.446

7 Indiana, Ohio 1.381 1.257

8 Michigan 1.537 1.399

9 Wisconsin 1.340 1.219

10 Iowa, Minnesota, North Dakota, South Dakota 1.375 1.252

11 Kansas, Nebraska 1.354 1.232

12 Missouri 1.325 1.206

13 Virginia 1.450 1.320

14 Delaware, District of Columbia, Maryland 1.423 1.295

15 Georgia 1.428 1.300

16 North Carolina, South Carolina 1.399 1.273

17 Florida 1.528 1.391

18 Alabama, Kentucky, Mississippi 1.364 1.241

19 Tennessee 1.353 1.231

20 Arkansas, Louisiana, Oklahoma 1.440 1.310

21 Texas 1.499 1.364

22 Colorado 1.499 1.364

23 Idaho, Montana, Utah, Wyoming 1.297 1.180

24 Arizona 1.707 1.553

25 Nevada, New Mexico 1.617 1.471

26 California 1.717 1.562

27 Oregon, Washington 1.498 1.363

28 Alaska 1.854 1.687

29 Hawaii 1.417 1.289

30 West Virginia 1.545 1.4066

- 21 Table 6.6.6 General Contractor Markups for Residential Boilers in Commercial Application

CBECS Regions Census Division Baseline

MU Incremental

MU

1 New England 1.326 1.205

2 Middle Atlantic 1.424 1.294

3 East North Central 1.313 1.193

4 West North Central 1.337 1.215

5 South Atlantic 1.296 1.177

6 East South Central 1.285 1.167

7 West South Central 1.367 1.242

8 Mountain 1.235 1.122

9 Pacific 1.244 1.130

6.7 SALES TAX

The sales tax represents state and local sales taxes that are applied to the consumer price of the equipment. The sales tax is a multiplicative factor that increases the consumer equipment price. DOE only applied the sales tax to the consumer price of the equi pment in the replacement market, not the new construction market. The common practice for selling larger residential appliances like boiler s in the new construction market is that general contractors (or builders)

bear the added sales tax for equipment

, in addition to the cost of equipment

, and then mark up

the entire cost in the final listing price to consumers. Therefore, no additional sales tax is necessary to calculate the consumer equipment price for the new construction market.

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

. 13

These data represent weighted averages that include county and city rates. DOE then derived shipment

- weighted average tax values for each RECS and CBECS region to match the regional markups for wholesalers and mechanical and general contractors, as shown in Table 6.7.1 and

Table 6.7.2

. Detailed sales tax data by each state can be found in a ppendix 6

- A. 5

.6

- 22 Table 6.7.1 Average Sales Tax Rates by RECS Region

RECS Regions State(s) Fraction of Total Shipments (2008

- 2012) Tax Rate (2013) %

1 Connecticut, Maine, New Hampshire, Rhode Island,

Vermont 16.0% 3.19%

2 Massachusetts 11.3% 6.25%

3 New York 25.6% 8.40%

4 New Jersey 10.5% 6.95%

5 Pennsylvania 10.1% 6.40%

6 Illinois 3.4% 8.05%

7 Indiana, Ohio 2.2% 7.07%

8 Michigan 1.8% 6.00%

9 Wisconsin 2.4% 5.45%

10 Iowa, Minnesota, North Dakota, South Dakota 3.1% 6.96%

11 Kansas, Nebraska 0.1% 6.76%

12 Missouri 0.2% 7.45%

13 Virginia 1.8% 5.60%

14 Delaware, District of Columbia, Maryland 5.5% 5.79%

15 Georgia 0.0% 7.05%

16 North Carolina, South Carolina 0.2% 6.94%

17 Florida 0.0% 6.65%

18 Alabama, Kentucky, Mississippi 0.1% 6.33%

19 Tennessee 0.1% 9.45%

20 Arkansas, Louisiana, Oklahoma 0.1% 8.71%

21 Texas 0.1% 7.90%

22 Colorado 1.5% 6.05%

23 Idaho, Montana, Utah, Wyoming 0.7% 3.36%

24 Arizona 0.1% 7.15%

25 Nevada, New Mexico 0.4% 6.89%

26 California 0.5% 8.45%

27 Oregon, Washington 2.0% 7.78%

28 Alaska 0.3% 1.30%

29 Hawaii 0.0% 4.40%

30 West Virginia 0.1% 6.10%

Shipment

- Weighted National Average 6.45%6

- 23 Table 6.7.2 Average Sales Tax Rates by CBECS Region

CB ECS Regions Census Divisions Fraction of Total Shipments (2008

- 2012) Tax Rate (2013) %

1 New England 27.3% 4.46%

2 Middle Atlantic 46.1% 7.63%

3 East North Central 9.8% 6.81%

4 West North Central 3.4% 6.98%

5 South Atlantic 7.5% 5.77%

6 East South Central 0.2% 7.93%

7 West South Central 0.2% 8.37%

8 Mountain 2.7% 5.46%

9 Pacific 2.7% 7.27%

Shipment

- Weighted National Average 6.4 5 %

6.8 OVERALL MARKUPS

The overall markup for each distribution channel is the product of the appropriate markups, as well as the sales tax in the case of replacement applications ( Table 6.8.1 ).

DOE used the overall baseline markup to estimate the consumer product price of baseline models, given the manufacturer cost of the baseline models. As stated previously , DOE considers baseline models to be product s 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 baseline models.



### ( )

BASE OVERALL MFG SALES BASE MFG MFG BASE MU COST Tax MU MU COST CPP

_ × = × × × = Eq. 6.8

. 4

Where:

CPP BASE = c onsumer product price for baseline models,

COST MFG = m anufacturer cost for baseline models,

MU MFG = m anufacturer markup,

MU BASE = b aseline replacement or new home channel markup,

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

MU OVERALL_BASE = b aseline overall markup.

Similarly, DOE used the overall incremental markup to estimate changes in the consumer product price, given changes in the manufacturer cost from the baseline model cost resulting from an energy conservation standard to raise product energy efficiency. The total consumer product price for more energy

- efficient models is compo sed of two components: the consumer product price of the baseline model and the change in consumer product price associated with the increase in manufacturer cost to meet the new energy conservation standard. The following equation shows how DOE used the o verall incremental markup to determine the consumer product price for more energy

- efficient models ( i.e., models meeting new energy conservation standards).6

- 24 

## ( )

INCR OVERALL MFG BASE SALES INCR MFG MFG BASE OVERALL MFG STD

MU COST CPP Tax MU MU COST MU COST CPP

_ _

× ∆ + = × × × ∆ + × =

Eq. 6.8

. 5

Where:

CPP STD = c onsumer product price for models meeting new energy conservation standards,

CPP BASE = c onsumer product price for baseline models,

COST MFG = m anufacturer cost for baseline models,

Δ COST MFG = c hange in manufacturer cost for more energy

- efficient models,

MU MFG = m anufacturer markup,

MU INCR = i ncremental replacement or new home channel markup,

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

MU OVERALL_BASE = b aseline overall markup (product of manufacturer markup, baseline replacement or new home channel markup, and sales tax), and

MU OVERALL_INCR = i ncremental overall markup.

National average baseline and incremental markups for each market participant are

summarized in Table 6.8.1 and Table 6.8.2 for residential boiler s . Based on residential boiler

s hipment forecasts for the year 20 20 (see chapter 9), DOE estimated that 2 0 percent of gas

- fired

and electric hot water boilers

, 5 percent of oil hot water boilers

, and 0 percent of gas

- fired

, oil

fired , and electric steam boilers go to new construction. On the other hand, 80 percent of gas

fired and electric hot water boilers, 95 percent of oil hot water boilers, and 100 percent of gas

fired

, oil

- fired , and electric steam boilers go to the replacement market. By weighing the markups by the market shares for each type of residential boiler and market , total markups are

listed in Table 6.8.3

.

Table 6.8.1 Summary of Overall Markups on Residential B oiler s in Residential Application
Replacement New Construction

Baseline Markup Incremental Markup Baseline Markup Incremental Markup

Manufacturer 1.41 1.41

Wholesaler 1.36 1.1 0 1.36 1.1 0

Mechanical

Contractor 1.53 1.22 1.45 1.15

General Contractor

-- -- 1.47 1.34

Sales Tax 1.06 1.06

-- -- Overall Markup 3.1 2 2. 01 4.09 2.396

- 25 Table 6.8.2 Summary of Overall Markups on Residential Boilers in Commercial Application
Replacement New Construction

Baseline Markup Incremental Markup National

Account :
Baseline/

Incr. MU Baseline Markup Incremental Markup National

Account:

Baseline/

Incr. MU

Manufacturer 1.41 1.41

Wholesaler 1.36 1.1 0 1.36/1.10 1.36 1.1 0 1.36/1.10

Mechanical

Contractor 1.53 1.22

-- 1.45 1.15

--

General

Contractor -- -- -- 1. 31 1.19

--

Sales Tax 1.06 1.06 1.06

-- -- 1.06

Overall Markup 3.1 2 2. 01 2.0 4 /1.64 3.64 2. 12 2.04 / 1.64

Table 6.8.3 Summary of Total Markup by Residential B oiler Product Class

Product Class Baseline Markup Incremental Markup

Gas

- fired hot water boiler 3.15 1.99

Gas

- fired steam boiler 3.15 1.99

Oil

- fired hot water boiler 3.00 1.96

Oil

- fired steam boiler 3.15 1.99

Electric hot water boiler 3.10 2.01

Electric steam boiler 3.15 1.996

- 26 REFERENCES

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2. Heating, Air Conditioning & Refrigeration Distributors International 2012 Profit Report,

< http://www.hardinet.org/Profit

- Report >

3. U.S. Census Bureau, Manuf acturing Industry Series: Detailed Statistics for the United

States: 2007. Air

- Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Mnufacturing. Data set for Sector 31: EC073111,

2007. < http://www.census.gov/econ/ >

4. U.S. Census Bureau, Wholesale Trade: Industry Series: Preliminary Summary Statistics for the United States: 2007. HVAC Equipment Merchant Wholesaler. Data set for Sector
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Air

- Conditioning Contractors), Co nstruction: Geographic Area Series, Detailed Statistics for Establishments, 2007. < http://www.census.gov/econ/ >

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8. U.S. Census Bureau, Plumbing, Heating, and Air

- Conditioning Contractors. Sector 23: 238220. Construction: Industry Series, Preliminary Detailed Statistics for
Establishments, 2007, 2007. < http://www.census.gov/eco n/ >

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- Family General Contractors, New Multifamily Housing Construction (Except Operative Builders), New Housing Operative Builders

Re si, 2007. < http://www.census.gov/econ/ >

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11. U.S. Department of E nergy: Energy Information Administration, Residential Energy Consumption Survey: 2009 RECS Survey Data, 2013. (Last accessed March, 2013.)

< http://www.eia.gov/consumption/residential/data /2009/ >6

- 27 12. U.S. Department of Energy

- Energy Information Administration, 2003 Commercial Building Energy Consumption Survey, Consumption and Expenditures (CBECS), Public
Use Data, 2003, < ftp ://ftp.eia.doe.gov/emeu/cbecs/microdata.html >

13. Sales Tax Clearinghouse Inc., State Sales Tax Rates Along with Combined Average City and County Rates, 2013. (L ast accessed January 22, 2014 .)

< http://thestc.c om/STrates.stm >