7-i 

### CHAPTER 7. MARKUPS ANALYSIS

TABLE OF CONTENTS

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

7.1.1 Baseline Markups

................................ ................................ .................................... 7-2

7.1.2 Incremental Markups .............................................................................................. 7-3

7.1.3 Overall Markups ..................................................................................................... 7-3

7.2 ESTIMATION OF WHOLESALER, CONTRACTOR, AND SALES TAX MARKUPS 7-3

7.2.1 Financial Information Sources ................................................................................ 7-3

7.2.2 Sales Tax ................................................................................................................. 7-5

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

LIST OF TABLES

Table 7.2.1 Gross Profit Margins for Electrical Wholesalers * 

### ..................................................... 7-4 Table 7.2.2 Calculated Electrical Wholesaler Baseline Markups for Metal Halide Lam p Fixtures

................................ ................................ .............................................................. 7-4 Table 7.2.3 Calculated Electrical Wholesaler Incremental Markups for Metal Halide Lamp

Fixtures * 

### ............................................................................................................... 7-5

Table 7.2.4 State and Local Sales Tax Rates ............................................................................... 7-6 Table 7.2.5 Regional Average Tax Rates .................................................................................... 7-6

LIST OF FIGURES

Figure 7.1.1 Metal Halide Lamp Fixture Distribution Channel ................................................... 7-17-1 

### CHAPTER 7. MARKUPS ANALYSIS

7.1 INTRODUCTION

This preliminary technical support document (TSD) chapter describes the methodology the U.S. Department of Energy (DOE) followed in developing end

- user prices and sales tax in the rulemaking analysis for metal hal ide lamp fixture s . This chapter also provid es initial results

for fixture end

- user prices and sales tax.

In this rulemaking, DOE performed teardown analyses and a manufacturer markup analysis to develop manufacturer selling prices (MSPs) for representative fixture designs ( preliminary TSD chapter 5). DOE then applied distribution channel markups and sales tax to

derive end

- user prices. By combining the engineering analysis results and the distribution channel markups analysis, DOE derived typical inputs for use in the life

- cycle cost (LCC) analysis and the national impact analysis (NIA). In particular, DOE developed end

- user prices for fixture designs associated with a candidate standard level.

The end

- user equipment price depends on how the end

- user purchases the equipment. For its preliminary analysis, DOE assume s a distribution channel where the fixture manufacturer

sells the fixture to an electrical wholesaler ( i.e. , distributor), who in turn sells it to a contractor,
who sells it to the end

- user. Figure 7.1.1 shows the distribution channel through which markups are applied to MSPs.

Figure 7.1.1 Metal Halide Lamp Fixture Distribution Channel

To meet new or amended energy conservation standards, manufacturers often introduce design changes to their equipment lines that result in increased production costs and MSPs. DOE

assumes that some or all of the increased production costs can be passed through the distribution

channels and eventually to end

- users in the form of higher sales prices.

At each point in the distribution channel, companies apply “markup” to the MSP to cover their business costs and profit margin. DOE models this markup as a multiplier. In financial statements, gross profit is the difference between the company revenue and the company cost of sales. It includes all corporate overhead costs (sales, general, and administration), materials and labor costs, research and development and interest expenses, depreciation and taxes, and profits.

In order for sales of equipment to contribute positively to company cash flow, the equipment’s markup must be greater than the sum of cost of sales and business costs for that equipment

. DOE7-2 

### calculates the end

- user sales price by multiplying the MSP by the various markups and applying

sales tax.

The end

- user prices and installation costs are key inputs to the LCC analysi s, payback period ( PBP ) analysis, and the NIA. Through the use of the distribution channel markups and installation costs, DOE can calculate the first costs that customers would face under the various efficiency levels evaluated. DOE evaluates the tradeoff between the increase in first cost and the resulting energy cost savings at each efficiency level in the LCC and PBP analyses ( preliminary TSD chapter 8) and NIA analysis (preliminary TSD chapter 10).

The following equation shows how DOE determined the eq uipment prices for fixtures:

) ( TAX CONT WHOLE MFR END MU MU MUPP ×× ×= 

### Eq. 7.1

Where:

END 

### P = equipment price to the end

- user ($),

MFR 

### P = MSP of baseline or standard

- level equipment ($),

WHOLE 

### MU = wholesaler markup,

CONT 

### MU = contractor markup, and

TAX 

### MU = sales tax markup.

For each of the parties involved in the distribution of the equipment, the markups presented above are further differentiated between a “baseline markup” and an “incremental markup,” as described below. A third type of markup, the “overall markup,” describes the product of all the markups within a distribution channel.

7.1.1 Baseline Markups

Baseline markups are defined as coefficients that relate the manufacturer price of baseline fixture designs to the wholesaler or contractor baseline sales price, as shown in the following equations:

) (

_ _ _ BASE W

HOLE BASE MFR BASE WHOLE MU P P × = 

### Eq. 7.2

) (

_ _ _ BASE CONT BASE WHOLE BASE CONT MU P P × = 

### Eq. 7.3

) (

_ _ TAX BASE CONT BASE END MU P P × = 

### Eq. 7.4

Where:

BASE MFR 

### P

_ 

### = MSP of baseline equipment ($),

BASE WHOLE 

### P

_ 

### = wholesaler selling price of baseline equipment ($),

BASE CONT 

### P

_ 

### = contractor selling price of baseline equipment ($),

BASE END 

### P

_ 

### = end

- user purchase price for baseline equipment ($),

BASE WHOLE 

### MU

_ 

### = wholesaler markup for base line equipment,7-3 BASE CONT 

### MU

_ 

### = contractor markup for baseline equipment, and

TAX 

### MU = sales tax markup.

7.1.2 Incremental Markups

Incremental markups are defined as coefficients that relate changes in the manufacturer price of higher efficiency equipment to change the wholesale or contractor sales price, as shown in the following equations:

) (

_ _ _ INCR WHOLE INCR MFR INCR WHOLE MU P P × = 

### Eq. 7.5

) (

_ _ _ INCR CONT INCR WHOLE INCR CONT MU P P × = 

### Eq. 7.6

) (

_ _ TAX INCR WHOLE INCR END MU P P × = 

### Eq. 7.7

Where:

INCR MFR 

### P

_ 

### = incremental manufacturer price for equipment with increased efficiency ($),

INCR WHOLE 

### P

_ 

### = incremental wholesaler price for equipment with increased efficiency ($),

INCR CONT 

### P

_ 

### = incremental contractor price for equipment with increased efficiency ($),

INCR END 

### P

_ 

### = incremental end

- user price for baseline equipment ($)

,

INCR WHOLE 

### MU

_ 

### = incremental wholesaler markup for equipment with increased efficiency,

INCR CONT 

### MU

_ 

### = incremental contractor markup for equipment with increased efficiency, and

TAX 

### MU = sales tax markup.

7.1.3 Overall Markups

Overall markups, including both overall baseline and overall incremental markups, relate the manufacturer price to the final customer price ( END 

### P ), as shown by the following equation :

) (

_ _ INCR END BASE END END P PP + = 

### Eq. 7.8

7.2 ESTIMATION OF WHOLES ALER, CONTRACTOR

, AND SALES TAX

MARKUPS

7.2.1 Financial Information Sources

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 Co mmission (SEC).

F iled annually, t he 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. For the wholesaler markup, DOE used 10- K reports from publicly owned lighting fixture manufacturers and electrical wholesalers, respectively

. The financial figures necessary for calculating the company markup are net sales, costs of sales, and gross profit. The in come statement section of the 10

- K reports often lists these7-4 

### figures. DOE used averages of the financial figures spanning 200 5 to 200 9 to calculate the markups.

DOE used the following equations to calculate the gross profit and gross profit margins:

Gro ss Profit ($) = Net Sales

– Cost of Sales Eq. 7.9



### Gross Prof it Margin Gross Prof it

Net Sales = Eq. 7.10

To calculate the time

- average gross profit margin for each company , D OE first summed the gross profit for all the years and then divided the result by the sum of the net sales for the

same years. DOE then used the gross profit margins to calculate baseline markups on existing equipment ( i.e. , prior to efficiency changes res ulting from enactment of proposed efficiency standards). Each company ’s baseline markup was calculated as:

Sales ofCost

SalesNet

) Margin Profit Gross1( 1 Markup Baseline
=

− = 

### Eq. 7.11

Table 7.2 .1 contain s the calculated gross profit margins for a sample of electrical

wholesalers

.

Table 7.2.1 Gross Profit Margin s for Electrical Wholesalers *

Company Financial Figure
$ Year

20 09 2008 2007 2006 2005

A Net Sales 4,377,882 5,400,154 5,258,301 5,009,143 4,288,043

Cost of Sales 3,522,932 4,354,935 4,225,983 4,047,692 3,477,009

Gross Profit 854,950 1,045,219 1,032,318 961,451 811,034

Gross Profit Margin ( % ) 19.5 19.4 19.6 19.2 18.9

Average Gross Profit Margin: 19 .3 %

B Net Sales 4,263,954 6,110,840 6,003,452 5,320,603 4,421,103

Cost of Sales 3,724,061 4,904,164 4,781,336 4,234,079 3,580,398

Gross Profit 539,893 1,206,676 1,222,116 1,086,524 840,705

Gross Profit Margin ( % ) 12.7 19.7 20.4 20.4 19.0

Average Gross Profit Margin: 1 8.4 %

* Unless noted, all numbers are in thousands of dollars. This table includes 200 5 , 200 6

, 200 7 , 200 8 , and 200 9 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 Metal Halide Lamp

Fixtures

Company Baseline Markup

Wholesaler A 1.24

Wholesaler B 1.2 3 Average 1. 237-5 

### The incremental markup applied to higher efficiency equipment is lower than the baseline markup because DOE assume d that expenses like labor and occupancy costs remain fixed and need not be recovered in the markup. Profits and other operating costs were assumed to be

variable and to scale with the MSP.

The surveyed SEC 10

- K reports did not typically separate labor and occupancy costs from overall expenses, so DOE assume d that these fixed costs are encompassed by “ s elling, distribution, and a dministrative e xpenses” (the most common terminology observed in the surveyed reports). DOE assume d that “ o perating p rofit” (operating income) covers other operating costs and profit ( i.e.

, variable costs). Each company ’s incremental markup was

calculated as:

     

+= Sales ofCost Profit Operating 1 Markup lIncrementa 

### Eq. 7.12

Table 7.2 .3 contain s the calculated incremental markups for the sampled fixture electrical

wholesalers

.

Table 7.2.3 Calculated Electrical Wholesaler Incremental Markups for Metal Halide Lamp

Fixtures *

Company Financial Figure
$ Year

2009 2008 2007 2006 2005

A Cost of Sales 3,522,932 4,354,935 4,225,983 4,047,692 3,477,009 Operating Profit 72,498 151,863 161,787 122,022 64,789

Calculated

Incremental

Markup 1.02 1.03 1.04 1.03 1.02

Average Incremental Markup: 1.0 3

B Cost of Sales 3,724,061 4,904,164 4,781,336 4,234,079 3,580,398 Operating Profit 179,952 345,667 394,224 364,983 209,286

Calculated

Incremental

Markup 1.05 1.07 1.08 1.09 1.06

Average Incremental Markup: 1.0 7

ALL Average Incrementa l Markup (All Wholesalers): 1.05

* Except for calculated incremental markup, all numbers are in thousands of dollars. This

table includes 2005, 2006, 2007, 2008, and 200 9 SEC 10

- K reports.



### 7.2.2 Sales Tax

The sales tax represents s tate and local sales taxes applied to fixtures

, and is a multipli cative factor that increases the end

- user cost . DOE obtained information on s tate and local sales tax from the Sales Tax Clearinghouse ( Table 7.2 .4 ). 1 

### These data repre sent weighted averages that include county and city rates. DOE then calculated population

- weighted average

tax values for each census division and four large s tates. These values allowed DOE to correlate the sales tax distribution with the electricity price distribution ( preliminary TSD chapter 8). DOE also calculated a national population

- weighted average sales tax for use as a single -value input to7-6 

### the LCC, should users want sing le

- average results. DOE also used this result in the NIA, where DOE did not use a distribution of inputs. 2



### Table 7.2.4 State and Local Sales Tax Rates

State Co mbined State

and Local Tax Rate

% State Co mbined State

and Local Tax Rate

% State Co mbined State

and Local Tax Rate

%

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

D .C.

Florida Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas 8.20

1.40

8.15

8.20

9.15

6.40

6.00

0.00

6.00

6.70

6.90

4.40

6.05

8.20

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

9.75

5.00

6.00

6.25

6.00

7.20

7.00

7.35

0.00

6.00

7.85

0.00

6.95

6.55

8.45

7.80 North Dakota

Ohio

Oklahoma Oregon Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont Virginia Washington West Virginia

Wisconsin Wyoming 5.80

6.80

8.15

0.00

6.40

7.00

7.05

5.50

9.40

8.05

6.70

6.05

5.00

8.75

6.00

5.45

5.15



### Table 7.2 .5 shows the distribution of sales tax rates that DOE developed for the LCC and PBP analyses. The distribution ranges from a minimum of 0 percent in some states to a
maximum of 9. 40 percent in Tennessee, with a national weighted average of 7. 25 percent

.

Table 7.2.5 Regional Average Tax Rates

Region or Large State Weighted

Sales Tax

% New England 5.55

Mid Atlantic 6.62

East North Central 6.88

West North Central 7.09

South Atlantic 6.43

East South Central 7.90

West South Central 8.41

Mountain 6.81

Pacific 5.21

New York 8.45

California 9.15

Texas 8.05

Florida 6.70 U.S. Average 7

. 257-7 

### REFERENCES

1. The Sales Tax Clearinghouse. State Aggregate Tax Rates . 2010. (Last accessed July 20, 2010.) < http://thestc.com/STrates.stm >

2. U.S. Census Bureau. Population Estimates C hange: April 1, 2000 to Jul y 1, 2009. 2009. (Last accessed July 2 0, 2010. ) < http://www.census.gov/popest/states/tables/NST -EST2008-

02.csv >