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 Lamp 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................................................... 7-1
7-1 

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 halide lamp fixtures. This chapter also provides 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 assumes 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. DOE 
7-2 

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 analysis, 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 equipment prices for fixtures:

END MFR ×= MUPP WHOLE MUCONT ×× MUTAX ) ( Eq. 7.1

Where:

PEND = equipment price to the end-user ($),

PMFR = MSP of baseline or standard-level equipment ($),

MUWHOLE = wholesaler markup,

MUCONT = contractor markup, and

MUTAX = 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: 

PWHOLE _ BASE = PMFR _ BASE × ( MUWHOLE _ BASE) Eq. 7.2

PCONT _ BASE = (PWHOLE _ BASE × MUCONT _ BASE) Eq. 7.3

PEND _ BASE = (PCONT _ BASE × MUTAX ) Eq. 7.4

 

Where:

PMFR _ BASE = MSP of baseline equipment ($),

PWHOLE _ BASE = wholesaler selling price of baseline equipment ($),

PCONT _ BASE = contractor selling price of baseline equipment ($),

PEND _ BASE = end-user purchase price for baseline equipment ($),

MUWHOLE _ BASE = wholesaler markup for baseline equipment,
7-3 

MUCONT _ BASE = contractor markup for baseline equipment, and 

MUTAX = 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: 

PWHOLE _ INCR = PMFR _ INCR × ( MUWHOLE _ INCR) Eq. 7.5

PCONT _ INCR = (PWHOLE _ INCR × MUCONT _ INCR) Eq. 7.6

PEND _ INCR = (PWHOLE _ INCR × MUTAX ) Eq. 7.7

Where:

PMFR _ INCR = incremental manufacturer price for equipment with increased efficiency ($),

PWHOLE _ INCR = incremental wholesaler price for equipment with increased efficiency ($),

PCONT _ INCR = incremental contractor price for equipment with increased efficiency ($),

PEND _ INCR = incremental end-user price for baseline equipment ($), 

MUWHOLE _ INCR = incremental wholesaler markup for equipment with increased efficiency,

MUCONT _ INCR = incremental contractor markup for equipment with increased efficiency, and 

MUTAX = 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 ( PEND ), as shown by the following equation: 

END = PP END _ BASE + PEND _ INCR) ( Eq. 7.8

7.2 ESTIMATION OF WHOLESALER, 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 Commission (SEC).

Filed annually, the SEC form 10-K provides a comprehensive overview of the company’s 

business and financial conditions. Relevant information in the 10-K reports includes the 

company’s revenues and direct and indirect costs. 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 income statement section of the 10-K reports often lists these 
7-4 

figures. DOE used averages of the financial figures spanning 2005 to 2009 to calculate the 

markups. 

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

Gross Profit ($) = Net Sales – Cost of Sales Eq. 7.9

Gross Profit Margin

Gross Profit

Net Sales = Eq. 7.10

To calculate the time-average gross profit margin for each company, DOE 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 resulting from enactment of proposed efficiency 

standards). Each company’s baseline markup was calculated as: 

 ofCost Sales

SalesNet 

Profit Gross1( Margin)

1 Baseline Markup = − = Eq. 7.11

Table 7.2.1 contains the calculated gross profit margins for a sample of electrical 

wholesalers. 

Table 7.2.1 Gross Profit Margins for Electrical Wholesalers*

Company Financial 

Figure

$

Year

2009 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: 18.4% * Unless noted, all numbers are in thousands of dollars. This table includes 2005, 2006, 

2007, 2008, and 2009 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 1.23

Average 1.23
7-5 

The incremental markup applied to higher efficiency equipment is lower than the baseline 

markup because DOE assumed 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 assumed that these fixed costs are encompassed by “selling, 

distribution, and administrative expenses” (the most common terminology observed in the

surveyed reports). DOE assumed that “operating profit” (operating income) covers other 

operating costs and profit (i.e., variable costs). Each company’s incremental markup was 

calculated as:





 



 +=

 ofCost Sales

Operating Profit lIncrementa Markup 1 Eq. 7.12

Table 7.2.3 contains 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: 1.03

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: 1.07

ALL Average Incremental 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 2009 SEC 10-K reports.

7.2.2 Sales Tax 

The sales tax represents state and local sales taxes applied to fixtures, and is a 

multiplicative factor that increases the end-user cost. DOE obtained information on state and 

local sales tax from the Sales Tax Clearinghouse (Table 7.2.4).1 These data represent weighted 

averages that include county and city rates. DOE then calculated population-weighted average 

tax values for each census division and four large states. 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 to 
7-6 

the LCC, should users want single-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 Combined State 

and Local Tax Rate

% 

State Combined State 

and Local Tax Rate

% 

State Combined State 

and Local Tax Rate

% 

Alabama 

Alaska 

Arizona 

Arkansas 

California 

Colorado 

Connecticut

Delaware 

D.C. 

Florida 

Georgia 

Hawaii 

Idaho 

Illinois 

Indiana 

Iowa 

Kansas 

8.20

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 7.25
7-7 

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 Change: April 1, 2000 to July 1, 2009. 2009. (Last 

accessed July 20, 2010.) <http://www.census.gov/popest/states/tables/NST-EST2008-

02.csv>