CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

TABLE OF CONTENTS

6.1 INTRODUCTION ........................................................................................................... 6-1

6.1.1 Distribution Channels...................................................................................................... 6-1

6.1.2 Markup Calculation Procedure ........................................................................................ 6-2

6.2 WHOLESALER MARKUP ............................................................................................ 6-2

6.2.1 Approach for Wholesaler Markups.................................................................................. 6-3

6.2.2 Derivation of Wholesaler Markup ................................................................................... 6-4

6.3 SALES TAXES ............................................................................................................... 6-7

6.4 OVERALL MARKUPS................................................................................................... 6-7

LIST OF TABLES

Table 6.2-1 Wholesaler Expenses and Markups..................................................................... 6-5

Table 6.2-2 Data for Incremental Markup Calculation: Professional and Commercial 

Equipment and Supplies (2007)........................................................................... 6-6

Table 6.3-1 Average Sales Tax Rates by Census Division and Large State ........................... 6-7

Table 6.4-1 Summary of Markups for Beverage Vending Machine....................................... 6-8

LIST OF FIGURE

Figure 6.1-1 Distribution Channels and Shares for Beverage Vending Machines................... 6-2

6-i
CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

6.1 INTRODUCTION

To carry out the life-cycle cost (LCC) calculations described in chapter 8 of the technical 

support document (TSD), the U.S. Department of Energy (DOE) needs to determine the cost to 

the customer of beverage vending machines. This cost is determined for both baseline equipment 

and more efficient equipment that the customer would purchase following the promulgation of 

any new or amended energy conservation standards. The manufacturer selling price (MSP) for 

both baseline equipment and more-efficient equipment are determined in the engineering 

analysis (chapter 5 of the TSD). By applying a multiplier called a “markup” to the MSP, DOE 

was able to estimate the customer price of equipment purchased through various distribution 

channels. This chapter describes how DOE derived these markups. 

DOE determines customer prices for beverage vending machines from MSP and 

equipment price markups using industry balance sheet data and U.S. Census Bureau data. To 

determine price markups, DOE identifies distribution channels for equipment sales and 

determines the existence and amounts of markups within each distribution channel. For each 

distribution channel, DOE distinguishes between “baseline markups” applied to the MSP for 

baseline equipment and “incremental markups” applied to the incremental increase in MSP for 

higher efficiency equipment. Overall baseline and overall incremental markups are calculated 

separately based on the product of all baseline markups at each step within a distribution channel 

or the product of all incremental markups at each step within a distribution channel, respectively. 

The combination of the overall baseline markup applied to the baseline MSP and the incremental 

markups applied to the incremental increase in MSP for higher efficiency equipment, including 

sales tax, determines the final customer price. 

6.1.1 Distribution Channels

The appropriate markups for determining consumer equipment prices depend on the type 

of distribution channels through which equipment move 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. As shown in Figure 6.1-1, DOE defined three distribution 

channels to describe how the equipment passes from the manufacturer to the customer. In the 

first distribution channel, the manufacturer sells the equipment to the bottler/distributor, who in 

turn installs, operates, and maintains the equipment on site at the user’s location. In the second 

and third distribution channels, the manufacturer sells the equipment to a wholesaler/distributor, 

who in turn sells it directly to the customer (vending machine operator or site owner). The site 

owner (third channel) purchases outright a small percentage of the machines from the distributor 

and stocks and maintains them on site. Figure 6.1-1 also gives the distribution channel shares (in 

percentage of total sales) through each of the three distribution channels. The distribution 

channel shares are based on industry comments from the 2009 BVM Final Rule.

6-1
 85% 10% 5%

Figure 6.1-1 Distribution Channels and Shares for Beverage Vending Machines

6.1.2 Markup Calculation Procedure

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 (GM) is the 

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

(CGS). The GM includes 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 profits. To cover costs and to 

contribute positively to company cash flow, the price of equipment must include a markup. 

Equipment commands lower or higher markups, depending on company expenses associated 

with the equipment and the degree of market competition. In developing markups for 

manufacturers and retailers, DOE obtained data about the revenue, CGS, and expenses of firms 

that produce and sell the equipment of interest. 

6.2 WHOLESALER MARKUP 

DOE based the wholesaler/distributor markups on U.S. Census Bureau data for the 

“Other commercial equipment merchant wholesaler” segment of durable goods and merchant 

wholesaler category of Wholesale Trade. Three key assumptions used to estimate markups for 

the beverage vending machine (BVM) wholesaler/distributor industry were: 

1. The data accurately represent the various costs incurred by firms distributing and 

installing beverage vending machine equipment. 

2. The costs can be divided into two categories: (1) costs that vary in proportion to the MSP 

of beverage vending machine equipment (variant costs), and (2) costs that do not vary 

with the MSP of beverage vending machine equipment (invariant costs). 

Beverage Vending Machine Manufacturer

Wholesaler/Distributor

Bottler/Distributor Vending Machine Operator Site Owner

6-2
3. Wholesaler/distributor prices vary in proportion to the stated wholesaler/distributor costs. 

In support of the first two assumptions, the cost data are categorized correctly to reflect 

the direct costs to purchase or install the equipment, operating labor and occupancy costs, and 

other operating costs and profit. 

Although BVM wholesaler/distributors may handle multiple commodity lines 

(including non-refrigerated vending machines and other equipment), the data provide the most 

accurate available indication of beverage vending machine equipment costs. DOE searched 

for, but did not find, data on two topics that relate to the price determined by the markup 

analysis. The first is the division and application of invariant and variant costs, and the second 

is the level of competition. 

In the case of the division and application of invariant and variant costs to determine 

baseline and incremental markups, DOE relied on prior analysis of the heating, ventilation, and 

air conditioning wholesalers, contractors, and consultants, including information obtained from 

the trade literature. This analysis indicates that wholesaler and contractor markups vary 

according to the quantity of labor and materials used to distribute and install appliances, with 

markups on labor tending to be much larger than markups on materials. The analysis implies that 

these distribution channel markups vary more with sales volume than with other factors, 

including appliance efficiency. Distribution channel labor inputs also vary more with sales 

volume than with appliance cost or efficiency. DOE assumed a division of costs between those 

that do not scale with the MSP (labor and occupancy costs) and those that do (operating costs 

and profit). This division of costs led to the estimation of wholesaler/distributor markups, as 

described subsequently. 

6.2.1 Approach for Wholesaler Markups

Using the previously mentioned assumptions, DOE was able to obtain the baseline 

markup for wholesalers using the industry financial data from the 2007 Economic Census for the

Other Commercial Equipment Merchant Wholesalers (NAICS 423440).

1 However, data from the 

2007 Economic Census did not provide enough of a detailed cost breakdown to calculate the 

individual values for occupancy and other operating expenses in order to estimate the 

incremental markup for this industry. DOE then used the 2007 Wholesale Trade Report for 

Professional and Commercial Equipment and Supplies (NAICS 42340), which represents a more 

aggregated industry but with detailed cost breakdown available.2 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 increased efficiency standards. DOE calculated the 

baseline markup for wholesalers using the following equation:

WHOLE

WHOLE WHOLE WHOLE

WHOLE

WHOLE WHOLE

BASE CGS

CGS IVC VC

CGS

CGS GM MU+ ( + ) = + =

6-3
Where:

MUBASE = baseline wholesaler markup, 

CGSWHOLE = wholesaler cost of goods sold,

GMWHOLE = wholesaler gross margin, 

IVCWHOLE = wholesaler invariant costs, and

VCWHOLE = wholesaler variant costs.

Incremental markups are coefficients that relate the change in the MSP of more energyefficient models, or equipment that meets the requirements of new energy conservation 

standards, to the change in the wholesaler sales price. Incremental markups cover only those 

costs that scale with a change in the MSP (variant costs, VC). DOE calculated the incremental 

markup (MUINCR) for wholesalers using the following equation:

WHOLE

WHOLE WHOLE

INCR CGS

CGS VC MU + =

Where:

MUINCR = incremental wholesaler markup,

CGSWHOLE = wholesaler cost of goods sold, and

VCWHOLE= wholesaler variant costs.

6.2.2 Derivation of Wholesaler Markup

DOE first attempted to use the 2007 Economic Census for the Other Commercial 

Equipment Merchant Wholesalers (NAICS 423440) to calculate markups for 

wholesaler/distributors. This sector includes establishments primarily engaged in distributing and 

wholesaling beverage vending machines and other equipment to restaurants and hotels (NAICS 

4234401) and stores (NAICS 4234402). However, as mentioned previously, the lack of a

detailed cost breakdown only allows DOE to estimate the baseline markup but not incremental 

markup. The sales revenue and gross margin reported in this series resulted in a baseline markup 

of 1.488 for other commercial equipment merchant wholesalers.

In order to obtain the incremental markup, DOE instead used the 2007 Wholesale Trade 

Report for Professional and Commercial Equipment and Supplies (NAICS 42340) as a proxy to 

the Other Commercial Equipment Merchant Wholesalers. Data for this sector include industrylevel sales revenue and expense data, which include labor expenses, occupancy expenses, other 

operating expenses, and profit. The baseline markup estimated from these data is 1.481, which is 

a close match to what DOE has seen in the Other Commercial Equipment Merchant Wholesalers

(1.488), indicating that this more aggregated industry is representative of the beverage vending 

6-4
machine wholesalers. Table 6.2-1 summarizes the simplified expenses and associated baseline 

and incremental markup estimation. 

Table 6.2-1 Wholesaler Expenses and Markups

Descriptions

Wholesaler Expenses or Revenue

Per Dollar

Sales Revenue

$

Per Dollar Cost 

of Goods

$

Direct Cost of Equipment Sales: Cost of goods sold 0.675 1.000

Labor Expenses: Salaries and benefits 0.099 0.147

Occupancy Expense: Rent, maintenance, and utilities 0.021 0.031

Other Operating Expenses: Depreciation, 

advertising, and insurance. 0.054 0.080

Operating Profit 0.150 0.223

Wholesaler Baseline Markup (MUWHOLE BASE) 1.481

Incremental Markup (MUWHOLE INCR) 1.303

Source: U.S. Census Bureau, 2007 Wholesale Trade Report (NAICS 42340 Professional and Commercial 

Equipment and Supplies) http://www.census.gov/wholesale/index.html

In this case, direct equipment expenses (cost of goods sold) represent about $0.675 per 

dollar sales revenue, so for every $1 wholesalers take in as sales revenue, $0.675 is used to pay 

the direct equipment costs. Labor expenses represent $0.099 per dollar sales revenue, occupancy 

expenses represent $0.021, other operating expenses represent $0.054, and profit accounts for 

$0.15 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 by $0.675 (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 $0.147 to cover labor costs, $0.031 to cover occupancy 

expenses, $0.08 for other operating expenses, and $0.223 in profits. This totals to $1.481 in sales 

revenue earned for every $1.00 spent on equipment costs. Therefore, the wholesaler baseline 

markup (MUWHOLE BASE) is 1.481 ($1.481 ÷ $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 0 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 $1.481, implying that the 

incremental markup is 1.481, 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. 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 $0.204, which when 

divided by 67.5 cents in cost of goods sold yields an increase of $0.303, giving a wholesaler 

6-5
incremental markup (MUWHOLE INCR) of 1.303. The more detailed cost breakdown is shown in 

Table 6.2-2. 

Table 6.2-2 Data for Incremental Markup Calculation: Professional and Commercial 

Equipment and Supplies (2007)

Amount 

($1,000,000)

Sales $354,304

Cost of Goods Sold (CGS) $239,155

Gross Margin (GM) $115,149

Labor & Occupancy Expenses (“Invariant”)

Total payroll, other employees’ wages $29,537

Total fringe benefits $5,015

Temporary staff and leased employee expenses $673

Rental costs of machinery and equipment $291

Rental costs of buildings $2,325

Cost of repair to building $411

Cost of repair to machinery and equipment $294

Purchased communication services $812

Purchased transportation, shipping and warehousing services $2,869

Purchased electricity and fuel $431

Subtotal: $42,658

Other Operating Expenses & Profit (“Variant”)

Purchased professional and technical services $2,827

Data processing and other purchased computer services $257

Expensed equipment $599

Expensed purchases of software $246

Advertising and promotion services $2,807

All other expenses $6,978

Refuse removal (including hazardous waste) services $69

Taxes and license fees $499

Total depreciation $2,271

Commission expenses $1,825

Purchases of other materials, parts, and supplies (not for resale) $833

Net Profit Before Income Taxes $53,280

Subtotal: $72,491

Baseline Markup = Sales/CGS 1.48

Incremental Markup = (CGS+Total Other Operating Expenses and Profit)/CGS 1.30

Source: U.S. Census Bureau, 2007 Wholesale Trade Report (NAICS 423400 Professional and Commercial 

Equipment and Supplies) http://www.census.gov/wholesale/index.html

6-6
6.3 SALES TAXES

The sales tax represents state and local sales taxes that are applied to the consumer 

equipment price. The sales tax is a multiplicative factor that increases the consumer equipment 

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

3

DOE derived population-weighted average tax values for each Census division and large state, as 

shown in Table 6.3-1.

Table 6.3-1 Average Sales Tax Rates by Census Division and Large State

Census 

Division/State 2019 Population 

Tax Rate (2014)

%

New England 15,309,528 5.69

Middle Atlantic 22,248,989 6.63

East North Central 48,208,733 6.91

West North Central 21,246,442 7.10

South Atlantic 45,035,501 6.08

East South Central 18,978,828 8.02

West South Central 11,515,069 8.65

Mountain 25,557,049 6.45

Pacific 13,879,323 5.30

New York 19,576,920 8.40

California 42,206,743 8.45

Texas 28,634,896 7.95

Florida 23,406,525 6.65

Population-weighted average 7.108

6.4 OVERALL MARKUPS 

The overall markup for each distribution channel is the product of the appropriate 

markups. 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 equipment 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.

( ) CPPBASE = COSTMFG × MU MFG × MUBASE ×TaxSALES = COSTMFG × MUOVERALL _ BASE

Eq. 6.4.1

Where:

CPPBASE = consumer product price for baseline models,

COSTMFG = manufacturer cost for baseline models,

MUMFG = manufacturer markup,

6-7
MUBASE = baseline wholesaler markup,

TaxSALES = sales tax, and

MUOVERALL_BASE = baseline 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 composed 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 overall incremental markup to determine the consumer 

product price for more energy-efficient models (i.e., models meeting new energy conservation 

standards). 

( )

BASE MFG OVERALL INCR

STD MFG OVERALL BASE MFG MFG INCR SALES

CPP COST MU

CPP COST MU COST MU MU Tax

_

_

= + ∆ ×

= × + ∆ × × ×

Where:

CPPSTD = consumer product price for models meeting new energy conservation standards,

CPPBASE = consumer product price for baseline models, 

COSTMFG = manufacturer cost for baseline models,

ΔCOSTMFG = change in manufacturer cost for more energy-efficient models,

MUMFG = manufacturer markup,

MUINCR = incremental wholesaler markup,

TaxSALES = sales tax,

MUOVERALL_BASE = baseline overall markup, and

MUOVERALL_INCR = incremental overall markup.

Table 6.4-1 summarizes the national average markups at each stage in the distribution 

channel and the average sales tax for each product class.

Table 6.4-1 Summary of Markups for Beverage Vending Machine

Distribution 

Channel

Manufacturer  Bottler/Distributor Manufacturer  Wholesaler 

Operator/Site Owner

Baseline Incremental Baseline Incremental

Manufacturer 1.26 1.26 1.26 1.26

Wholesaler - - 1.48 1.30

Sales Tax 1.071 1.071 1.071 1.071

Markup Not 

Including 

Manufacturer

1.071 1.071 1.585 1.392

Overall Markup 1.349 1.349 1.997 1.754

6-8
REFERENCES

1. U.S. Census Bureau, 2007 Economic Census, Wholesale Trade: Subject Series -- Misc 

Subjects: Gross Margin and Gross Profit. Washington, DC. Report No. 

EC0742SXSB06; EC0742SXSB07. <http://www.census.gov/econ/census07/>

2. U.S. Bureau of the Census, 2007 Annual Wholesale Trade Report, NAICS 4234: 

Professional and Commercial Equipment and Supplies, 2007. Washington, DC. 

<http://www.census.gov/wholesale/index.html>

3. Sales Tax Clearinghouse Inc., State Sales Tax Rates Along with Combined Average City 

and County Rates, 2014. (Last accessed January 10, 2014.) 

<http://thestc.com/STrates.stm>

6-9