DRAFT 

. , 

Mark-ups FQr 

c·lothes Washer·· 

Rulemaking 

Analysis 

U.S. Department of Energy 

Office of Codes and Standards 

1000 Independence Ave., SW · 

Washington, DC 

Date: February 17, 1998 

..... 
DRAFT 

Table of Contents 

Abstract ... ~ .......................... : ..................................................... ~· ............ : ...................... 1 

1.0 Retail Mark-ups ...................................................................................................... .-2 

1.1 Background .......... : ... : .......................... , ...................... ; ................................. 2 

·1.2 Retail Price Information ................................................................ : ............. 3 

1.2.1 Consumer Expenditure Surveys (CES) ....... : ........................................ 3 

1.2.2 Dealerscope Merchandising Statistical and Marketing Reports ....... : .... 4 

1.2.3 ELCAP Clothes Washer Sales Information .......................................... 4 

1.3 Manufacturer Price lnfomiation .............................................. : ................... 5 

1.3.1 Current Industrial Reports (CIR) ........................................................... 5 

·1.3.2 AHAM Fact Book ..... ; ............................................................................ 6 

1.4 Retail· mark-ups from Manufacturer and Retail Price Information ............... 6 

1.5 Retail mark-ups estimated from SEC's Financial Statements ..................... 8. 

2.0 Sales Tax ............... ~ .............................................................................................. 9 

3~0 Manufacturer Mark-ups ........................ : ...... :.:.: .................................................. 10 

3.1 Background ... : .......................... : ....... ~ ......................................................... 10 

3.2 Manufacturer Price and .Mark-up for the. Baseline· Standard Clothes · 

Washer .............................. : ........................................................................ 10 

3.3 Manufacturer Price and Mark-ups for Different Efficiency. Levels ............. 13 · 

·3.3.1 Pre-ANO PR Analysis ....................................................................... · .... 13 

3.3.2 Post-ANOPR Analysis .............. : ............................... : ......................... 13 

Appendices 

1. Retail mark-ups from past analyses". .............. ~ ....... : ........................... · ..... : .............. 15 

2. Clothes washer industry data ..................... ~ .................................................. ~ ........ 16 

3. Clothes washer industry cost structure developed in Arthur D. Little's 

rep.Ort to AHAM in 1991.: .......................... : .............. : ............................................... 17 

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Mark-Ups For Clothes Washer Rulemaking Analysis 

Abstract: The following figure illustrates the representative prices and mark-ups for a 

typical vertical axis clothes washer being sold in the U.S. marketplace:, 

Total Mark-up 

1.35 x 1.40 x 1.052 = 1.990 

Manufacturing Manufacturer 

Cost 1--,__.....__..,... Price i------

$211.50 $285.90 

Retail 

Price 

$400.25 

Figure 1. Average costs. and mark-ups for the baselioe clothes washer 

Consumer 

Price 

$421.10 

To perform Pre-ANOPR analysis, the Depar:tment proposes a 2-step mark-up approach 

where: {a} the manufacturing costs (i.e., full production costs) are marked up to the 

manufacturerprice using a manufacturer mark-up; and (b) ·the manufacturer price is . 

marked up by a retail mark-up to a"ive at the retail price. The price paid by the 

consumer includes the sales tax in addition to the retail price. This sales tax is 

accounted for by using a sales tax mark-up over the retail price of the clothes washer. 

The Department proposes a fixed retail mark-up of 1.40, and a fixed mark-up of 1.052 

to cover the sales tax. The manufacturer mark-up over full production costs will be 

bound by a maximum value of 1.35 which maintains industry (manufacturer) cost 

structure, and.a.minimum value of 1.00 which represents a pass-through of full 

production costs including depreciation of new capital but no recuperation of nonproduciion costs. 

, Based on the information qbove, the total mark-up from full prQduction costs to 

consumer price varies from a minimum of 1.473 to a maximum of 1.990. The 

fJePirtmentproposes to characterize the total mark-up using a triangular distribution 

' . 

I In this description 'a typical mut refers to a high production volume model with high market share 

(industry average); not necessarily.a minimally complying unit under NAECA, or a unit with an MEF 

value of 0.817 (AH.AM baseline). Currently no data exists that would allow the Department to associate 

sales information on the basis of the MEF descriptor to be Used, in the present rulemakin,g. In the · 

absence of specific price information for a baseline; (0. 817 MEF) Clothes washer, typical values will be 

used as default values for the baseline model. Since the life-cycle-cost (LCC) analysis uses differential 

costs only, the absolute value of the baseline unit cost has no impact on LCC and payback analy~is.' The 

absolute ~alue of the baseline unit cost is important, however, if price survey information is used to 

compare prices derived from a mark-up over cost with prices observed in the market. 

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with the above stated minimum and maximum values and a most likely value which is 

the average of the two extremes. , 

This total inark .. up distribution will be used by the Department as a means of estimating', 

future coniumer prices of clothes washers. , ' 

. . . . 

Section 1 of this document pre~ents a discussion on retail mark-ups, presenting current 

and historical retail mark-ups for clothes washers. Section· 2 presents a brief disC,ussion 

on sales tax and its effect on consumer price, Section 3 outlines the Department's 

methodology/or estimating manufacturer mark-up$. 

1.0 Retail Mark-ups 

The objective of this section is to estimate the manufacturer price-to-retail price mark-up 

for clothes washers from the available sources of price information: 

1,.1 Background 

. One measure of the effect of appliance efficiency standards on the consumers is the 

change (increase) in the purchase price of the appliance. A more stringent standard 

usually results in increased manufacturing costs to the manufacturers. These increased 

costs (and associated margins) are passed;.through·from the manufacturers to the retailers 

and eventually to the consumer in the form of higher purchase prices. 

It is important to identify what proportion of the standards-induced costs will be.: 

reflected in retail prices, as this mechanism is important for the rulemaking in two ways: 

a lower margin over incremental manufaeturing costs passed.:.through justifies a less 

stringent standard from a manufacturer impact standpoint; and has the opposite effect of . 

lowering consumer life-cycle costs that justif1es a more stringent standard from a 

consumer perspective. ' 

Retailers buy appliances (clothes washers in this case) from manufacturers and sell them· 

to consumers at higher prices to cover their operation costs and profit margins. Th~ 

amount by.which the manufacturer price (price paid by the retailer to the manufacturer) 

is marked up by the retailer to arrive at the retail price is referred to as the retail mark-up. 

In this section we estimate the manufacturer price-to-retail price mark-up for clothes 

washers (i.e., the retail mark-up) based on available historical market information. 

Sources ofinformation for the retail price of doth es washers include: 

(1) Consumer Expenditure Surveys, conducted by the Bureau of Labor Statistics in 

conjunction with the Bureau of Census 

'(2) Dealerscope Merchandising' s Annual Statistical Surveys. 

(3) ELCAP price database 

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Sources of infonnation for the manufacturer price of clothes washers include: 

(1) Current Industrial Reports, U.S. Department ofComn:ierce 

(2) Association ofHomeAppliance Manufacturer.s' Fact Boo~ 1997 

Sections 1.2 and 1.3 pre.sent the retail and manufacturer price data, respectively; along 

with short descriptions of the data collection procedures and the characteristics of each 

of these data sets. These data sets are then use~.tb arrive at the retail mark-ups which 

are reported and compared in Section 1.4. Retail prices from each data sou'rce wiU be . 

divided by manufacturer prices from each of two sources for manufacturer price, thereby 

resulting in.six different sets cif estimates fo~ retail mark-up~. Section 1.5 presents an 

analysis of financial statements (SEC 10-l< reports) of a few appliance retailers to get an 

under&tanding of gross margins in the appliance re.tail business. 

1.2 Retail Price Information 

1.2.1 Consumer Expenditure Surveys (CES) 

Consumer Expenditure Surveys (CES) ·provide infonnation on the. buying habits of 

American consumers, including data on their expenditures,· income, and consumer unit 

(families and single consumers) characteristics .. The survey consists of two components: . 

a quarterly Interview Survey and a weekly Diary Survey, ·each with.its own questio~aire 

and sample. Data collection is carried out by the Bureau of Census under contract with 

the Bureau of Labor s·tatistics (BLS). 

The data are collected in independent Quarterly Interview and Weekly Diary surveys of 

·approximately 5,000 sample households. Each survey has its own independent sample, 

and each collects data on household income and socioeconomic characteristics. · The 

Interview survey includes monthly out-of-pocket expenditures,_ such as housing, apparel, 

transportation, major home appliances, health care; insurance, and en~ertairunent. The 

Diary survey includes weekly expenditures of frequently purchased. items, such as food 

and beverages, tobacco, person~ care products, and non-prescription drugs and supplies. 

Table 1 shows the unweighted average purchase price of clothes washers as reported in 

the consumer expenditure surveys. These values represent the price to consumers net of 

a trade-in and represent purchases by_ individuals. These values are reported for the · 

period of time 1986 througn 1994.2 T~bl~ 1 also_ shows the re~ail price of these washers. 

The retail prices were estimated by subtracting the sales tax from the purchase price paid . . . .. \. . . . ·• . . by consumers (based on sales tax rates and shipments of clothes washers m all the .so 

states, a shipment we.ighted average sale.s tax of 5.2% was calculated). 

2 Data for the year 1995 is currently being retrieved. It should be available by February 199~. 

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Purchase 

Price($) 

Retail 

Price($) 

431.98 432.29 437.60 442.23 444.21 444.05' 435.21 419.43 435.06 

410.63 410.92 415.97 420.37 422.25 ·422.10 .413.70 398.70 4"13.56 

Table 1. Retail prices of clothes washers.from 1986 through 1994 obtained from the 

Consumer Expenditure Surveys. 

1.2.2 Dealerscope Merchandising Statistical and Marketing Reports 

Dealerscop~ is the monthly trade publication for retailers of consumer electronics, major 

appliances, and computers. The magazine covers product news, industry trends, and new 

technologies, along with reports on the marketing, branding, merchandising, and retail 

strategies of vendors and dealers. 

Dealerscope reports contain one-year and five-year unit shipments industrywide and the 

retail value of these shipments. In these reports the data is based on information 

provided by leading manufacturers .. Companies are asked to i~dicate how much the 

overall total shipments and average retail prices have chang~d for the industry, and for · 

the product category. Manufactur~rs are not asked for-the ~ual changes in their own 

companies' shipments. or in retail pric~s of their own brand of merchandise. 

Table 2 provides the ,retail price of clothes washers estimated from the statistical reviews. 

The estimated retail value of clothes washers shipped from factories is divided by the . 

clothes washer units ship·ped industrywide to arrive at the per unit retail price. · 

••Yeaif ::::;::::,:p l Jt9.8~ •• :!198.7• •• /l93s: •• JH)89 :: '199.Qf ii99Ut d!QQZ@ H99~•I t199.~W:i M'l9.9$.J= . Retail Price 439.3 440.4 440.4 406.1 410.2 415.0 382.8 382.7 394.2 394:2 

($) 

·Table 2. Retail prices of clothes washers from 1986 through 1995 estimated from 

Dealerscope Merchandising's Annual Statistical Reviews .. 

1.2.3 ELCAP Clothes Washer Sales Information 

The ELCAP3 service collects sales data (retail prices) on clothes washers from a number 

of retailers-consumer electronics superstores, appliance stores, and mass merchants. 

Table 3 presents shipment weighted retail price for the years 1994 through 1997. (The 

1997 retail price is based on sales data through August 1997.) 

3 ELCAP service was discontinued at the end of 1997. Clothes washer retail sales are currently being 

tracked by INTELLECT.ASW. . . 

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393.00 371.92 390.07 . 388.21 

Table 3. Shipment weighted retail prices of clothes washers from 1994 through 1997 

based on ELCAP retail sales data. 

1.3 Manufacturer Price Information 

1.3.1 Current Industrial Reports (CIR) 

The CIR program has been providing monthly, quarterly, and annual measures of 

industrial activity for many years. The primary objective of the CIR program is to 

produce timely, accurate data on production and shipments of selected products. The 

data are used to satisfy economic policy nee.ds and for mark'et analysis,· forecasting, and 

decision making in the private sector. The CIRs ;nclude statistics for the United States 

on the quantity and value of shipments al<?ng with comparative data on exports, imports, 

. and domestic ou.tput. 

The CIR.program uses a unified data collection, processing, an~ publication system. The 

census bureau updates the survey panels for most reports annually and reconciles the 

estimates to the broader-based annual survey of manufactures and the census of. 

manufactures. The census of m.anufactures provides a complete list of all producers of 

the products covered by the.CIR program and se~es as the primary source for CIR. 

sampling. The CIR program includes a group of mandatory and voluntary surveys. 

Typically, the monthly and quarterly surveys are conducted on a volllntary basis. Those. 

companies that choose not to respond to the voluntary surveys are required to submit a 

mandatory annual counterpart corresponding to the more frequent survey. 

The figures on quantity and value of shipments represent physical shipments of all 

·products sold~ transferred to other establishme.nts of the same company or shipped on 

consignment, whether for domestic or export sale. The value represents the net sales 

price,. f.o.b. plant; to the customer or branch to which the products are shipped, net of 

discounts, allowances, freight charges, and returns. Shipments to a company's own . 

branches are assigned the same value as comparable appropriate allocation of company 

overhead and profit. Products bought and resold without further manufacture are 

excluded. · 

Table 4 provides the estimated manufacturer price of clothes washers. The value of the 

clothes washers shipped from factories is divided by the quantity of shipments to arrive at 

the per unit manufacturer price. 

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272.6 266.9 262.0 277.3 278.l 275.9 277.6 283.8 279.0 273.2 275.2 

Table 4. Manufacturer prices of clothes washers from 1986 through 1996 estimated from 

Current Industrial Reports. · · 

1.3.2 AHAM Fact Book 

The AHAM (Association of Home Appliance Manufacturers) Fact Book.is a· 

comprehensive collection of facts defining the u.s .. major home appliance industry, its. . ' 

market and its products. The Association lists. both: 

• the total manufacturers' sales of cl.othes washers (excludes freight charges or · 

extended warranty costs), and 

• the industry unit shipments (domestic and expo~s) or clothes washers .. 

The above stated information can be used to arrive at an average per-unit manufacturer_ 

price for clothes washers, presented in Table 5. 

iil:f:eiii::::::::f:i:f:IE:::::: 

.Manuf. Price 

$ 

a9:J2iil :::1:933,:,::: :::::.:fQ$9.:::: 1'?ii99Q':' Hit92'1I :j)ti2~::::~ :::::19.94% :::MQ25m 

26J.9 269.l 277.7 '286.7 287:8 291.3 292.4 299.4 302.9 287.4 

. ' 

'Table&. Manufacturer prices of clothes washers from 1986 through 1996 estimated 

using .data from the AHAM Fact Book. 

1.4 Retail mark-ups from Manufacturer and Retail Price Information 

Table 6 shows average retail mark-ups over the 9-year period, 1986 through 1994, for ' 

clothes washers sold in the U.S. The retail mark-ups in this table are obtained using 

manufacturer and retail price information obtained from governmental sources-retail 

price information from the Consumer Expenditure Surveys conducted by the Bureau of 

Labor Statistics, and manufacturer price information from the Current Industrial Reports 

prepared by the Bureau of Census. 

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Year Retail Manuf. Retail 

. Price Price Markup 

. (CES) .(CIR) 

1986 410.6 272.6 1.51 

1987 410.9 266.9 .1.54 

1988 416.0 262.0 1.59 

1989 420.4 277.3 1.52 

1990 422.3 .278.1 1.52 

1991 422.1 275.9 1.53 

1992 413.7 277.6 1.49 

1993 398.7 283.8 1.40 

1994 413.6 279.0 1.48 

Table·&. Retail mark-ups for clothes washers from 1986 th.rough 1994 using retail prices 

from the Consumer Expenditure Surveys, and manufacturer prices from the Current 

lnduStrial Reports. · · 

Table 7 gives the retail mark-ups estimated using price information from different data 

sources explained earlier in the text, and the same information Is presented graphically in 

Figure 2. For the period 1986 through 1996, the average retail mark-up varies· from a 

minimum of 1.33 (in 1995) to a maximum of 1.62 (in 1988). 

Ye.ar Retail Retail Retail Retail Retail Retail Average · 

Mark-up Mark-up Mark-up Mark-up Mark-up Mark-up Retail 

(Dealerscope) (Dealerscope) (CES) (CES) (EL CAP) (EL CAP) Mark-up 

(AHAM) ·(CIR) (AHAM) (CIR) (AHAM) (CIR) , 

1986 1.65 / 1.61 1.55 . 1.51 1.58 

1987 1.67 1.65 1.56 1.54 1.61 

1988 1.64 1.68 1.55 1.59 1.62 

1989 1.46 1.46 1.51 1.52 1.49 

1990 ' 1.43 1.47 1-.47 1.52 1.47 

1991 1.44. 1.50 1.47 1.53 1.49 

1992 ' 1.31 1.38 1.42 1.49 1.40 

1993 1.31 1.35 1.36 1.40 1.36 

1994 1.32 1.41 1.38 1.48 1.31 1.41 1.39 

1995 1.30 1.44 1.23 1.36 1.33 

1996 1.36 1.41 1.39 

J 

Table 7. Retail mark-ups estimated from different data sources. 

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1.Bl,..-------------•1 

1. 

t 1.5 

1! 1.4 .. 

:Ii 1.3 

1.2 

1., 1.0---------------'l 

1986 1988 1990 1992 1994 1996 

Year 

....-0ea1erscope-AHAM 

• --Oealerscope-CIR. 

........ CES-AHAM 

"""*-CES-CIR 

-+-ELCAP·AHAM 

-+-ELCAP·CIR 

Figure 2. ·Re.tall mark-ups estimated .from different data soun:es. 

1.5 Retail mark-ups estimated from SEC's flnanCia1 Statements 

Infonnation relating to the gross margins (or gross profit) of appliance retailers can be 

obtained from theit SEC I 0-K financial statements. Table s. presents gross margins for 

some appliance retail companies (Best Boy, Circuit City Stores, Lowe's, and Sun T.V. 

and Appliances). Most of these retailers sell electronics and home office equipment · 

along with household appliances. The margins in Table 8 represent the average of the 

margins that.retailers obtained from sales in all the above mentioned categories. On 

average, appliance sales are more profitable (i.e., obtain higher margins) than sale~ of 

personal computers, T. V. 'sand other electronics due to the intensely competitive and 

highly promotional pricing environment in the electronics retail environment.. As a 

consequence, some retailers are trying to further increase their margins by growing the 

appliance part of their business and by putting greater emphasis on the sale of extended 

service contracts:• 

1.34 

26.3% 1.36 

16.2% 9.0 1.19 

25.7% 17.5 1.35 

Table a. Gross margins for retailers of electronics, home office equipment and major 

appliances.· 

'.Source: Standard and Poor's Stock Repons on Circuit City Stores and J;lest Buy. 

5 Source: Standard and Poor's Stock Repons on Best Buy. 

6 Retail mark-up: 100/(100-Gross margin). Mark-up for cloehes washers (appliances) should be higher 

~ven the product mix: , 

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Typi~ally in the retail industry, gross profits, as r~ported.in SEC lO~K statements, are 

obtained by subtracting the 'cost of sales' fromthe 'net sales.' Dividing gross profit by 

the net sales gives the gross margin. Gross margin represents the mark-up that retailers 

receive over the total of the: · · 

• price that the retailers· pay to the manufacturers for buying the goops, ; 

• costs involved in the process of buying the goods from manufacturers (these might 

include some transportation costs, administration and labor costs), and · 

• · costs of maintaining and operating warehouses where the goods are stocked after 

they are. bought from manufacturers. 

Fr.om the above description of gross margins, it can be seeri that the retail rriark"'ups 

(defined earlier in this Write-up as the ratio of r~tail price to manufacturer price) will be,· 

in g~neral, higher than what the gr.oss margins indicate. This is because in addition to · 

profits and SG&A,. the retail mark-ups will also have to coverthe costs incurred by . 

retailers for buying and warehousing activities:_ The buying and warehousing· costs as a 

percentage of the net sales or revenues are not available. , 

2.0 Sales Tax 

Consumers pay sales tax in addition to the retail price at the time of purchasing an 

appliance. J'his additional margin for _sales tax rieeds to be refle.cted in the mark-up from 

manufacturer price to consumer price. 

For the year 1995, the shipment weighted sales tax on clothes washers was calculated to. 

be 5.2%. This information is based on individual sales tax rates for 50 states and. 

weighted by th~ clothes washer shipments (source: AHAM}in each of these.states. 

Hence, a.mark-up of 1.052 will be used to cover the' sales tax. · -

In the year 19,94, for which retail price is available from all ~he three sources, namely, 

CES, Dealerscope, and EL.CAP, the average clothes washer retail price is $400.25. 

Looking at tables 2 and j, there seems to be no discernible change in clothes washer 

retail prices since 1994. Hence (in the absence of price information specific to clothes 

washers with an MEF·value of0.817), the Department proposes to use $400.2~ as the 

baseline retail price for ·the clothes washer rulemaking analysis. Adding a 5 .2% sales tax 

would r~sult in a base)ine consumei: price of $421.10. 

Looking at Table 7, the retail mark-up, on average, in the past three years has been 

around 1.40. Adding a sales tax of 5.2%.on top of the retail price would result in a 

manufacturer price-to-consumer price mark-up of 1.473. This mark-up of 1.473 is in 

· agreement with the mark-up of 1.4 75 used In the 1991 report to AHAM entitled 

"Financial.Impact of DOE Top Loading.Horizontal Axis Standards on U.S. Washing 

Machine Manufacturers." Hence, the Department of Energy proposes using a retail 

mark-up of 1.40, and a sales tax mark-up of 1.052 to arrive at the consumer price (or the 

clothes washer rulemaking analysis. · 

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3.0 ""Manufacturer Mark-ups . 

The.objective of this· section is to outline a methodology for estimating the mark-:up from 

manufacturing cost to manufactUrer price for the clothes washer rulemaking analysis. . 

3.1 Background 

In order to meet the new appliance efficiency standards, ~anufacturers may have to 

introduce d~sign changes in their product lines. · These design changes usually result in 

increased manufacturing costs: The increased manufacturing costs are "passed-through" 

from manufacturers to retailers and eventually to consumers in the form of higher 

purchase prices. · 

In this section we try to estimate the manufacturing cost to manufacturer price mark-up. 

This is referred to as the manufacturer mark-up. The inanufactur~r mark-up h.as an 

important bearing on the manufacturers' profitability, as a higher mark-up suggests that 

manufacturers can pass-through the variable costs and some of the product conversion · 

·.costs (the fixed costs) to retailers and eventually to consumers; whereas a lower mark-up 

implies that manuf~c:turers will not be able to fully recover the necessary investment in 

plant and equipment. 

3.2 Manufacturer Price;! and Mark-up for the Baseline Standard Clothes Washer 

The average retail price of a clothes washer in 1994 was $400.25 (as discussed in Section 

2.0). Using a retail mark-up of 1.40 (also di~cussed in Section 2.0), _the baseline 

manufacturer price would be $285.90. . 

Based on publicly available information frotn the Census of Manufactures an~ the SEC 

10-K reports filed by publicly owned manufacturers (Appendix 2), the washing machine 

industry cost structure can be developed. The resulting cost structure is shown in Figure 

3. This is a composite for the industry as a whole; no single firm may have these actual 

results. In developing the cost structure for the washing machine industry, it is assumed 

that washing machines are a microcosm of the total major appliance industry. The 

industry cost structure based on most recent public information, shown in Figure 3, 

compare~s weU with the cost. structure developed by Arthur D. Little in the 1991 report to 

AHAM (Appendix 3). 

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SG&A 

18.3%. 

R&D 

1.8% 

Overhead 

11.7% 

Income from 

Operations 

6.0% 

Material 

62.0% 

Figure 3. Washing machine industry cost structure as a percentage of revenues. 

Manufacturing cost estimates for the baseline clothes washer can be estimated from the 

baseline manufacturer price ($285.90) and the above displayed industry cost structure. 

This is shown in Table 9. The break-up of the price is based on the assumption that in 

order to earn a satisfactory return, revenues from the sale of goods (and hence the 

· manufacturer price) must be large enough both (1) to recover costs and (2) to earn a 

profit that pr<?vides a satisfactory return on investment. . 

:::1e•tf*idtJ'i']::::,,:::::rn='':I'rn::1:]:t']:::':: ]:cb.i(::ts1]:: 

Material 148. 7 

Labor 29.3 

Overhead 3 3. 5 

Table 9. Manufacturing cost of a baseline· clothes was~er estimated from the industry 

cost structure 

The full production cost of a baseline clothes washer is estimated to be $211.50. The full 

production cost (also called the inventory cost) and the non-production cost together 

constitute the full cost of a product. The full production cost is the sum of the direct 

· material cost, the direct labor cost, and the overhead cost which includes depreciation 

(-3.5% of revenues). The non-production costs include selling costs, general arld 

administrative costs, reseatch and development costs, and interest costs. The full cost of 

a product and its components are shown in Figure 4. 

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Full Production Cost 1 Non-Production Cost 

•• 

I 

1 Tax Reform Ad of 1986, essentially, requires companies to measure oost of goods sold as the full production oost of the goods sold. . ' 

· Figure 4. The components of full cost of a product. 

Baseline manufacturer mark-up is defined as the increase in price over the full production 

cost of a baseline clothes washer, and is calculated as: 

. Manufacturer Price Basel me manufacturer mark - up. = --------

Full Production Cost 

A baseline mark-up is applied over the full production cost to arrive at the manufacturer 

price at which the firm can recover all 'costs, both production and non-production, and 

earn a profit. In general, the manufacturer mark-up should ensure that the manufacturer 

price of the product is high enough (I) to recov~r the full cost of the product and (2) to 

yield a satisfactory profit. Such a price is called a normal price. 7 

A baseline manufacturer mark-up of 1.35 over full production cost is calculated from the 

cost information in Table 9. · 

7 Some J)eople question whether full costs are widely used as ~ basis for pricing. In a survey of lar~e industrial companies, 85% reported that they do use full coSt pricing. · (Source: V. Govindarajan and 

Robert N. Anthony, "How Firms Use Cost Data.in Pricing Decisions," Management Accounting,'July 

1983, pp. 30-36.) 

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3.3 Manufacturer Price and Mark-ups for Different Efficiency .Levels 

3.3.1 'Pre-ANOPR Analysis 

For the ANOPR analysis the Department Will use an average manufacturer mark-up of 

J'.35 as an upper bound in conducting the LCC analysis. The Department will use a 

mark-up of 1.00 as a lower bound. This lower bound represents pass-through of 

incremental full product costs, including depreciation of new capital expenditures, There 

is, however, no recuperation of incremental non-production costs (which include R&D 

and marketing expenses): 

In order to characterize the uncertainty in manufacturer mark-ups, the Department 

proposes using a triangular distribution characterized by a maximum manufacturer markup of 1.35, a minimum manufacturer mark-up of 1.00, and a most likely mark-up of 1.18 

(the average).· Adding a fixed mark-up to r~tail price (of 1.40) and then to consumer 

price (mark-up of 1.052), as discussed in Section 2.0; the total mark-up from 

manufacturing cost to consumer price would be bound by the following values: 

• minimum value of LOO x 1.40 x l.0_52 = 1.473 

• maximum value of 1.35 x 1.40 x 1.052 = 1.990 

The Department proposes to characterize the total mark-up using a triangular .. 

distribution with minimum, maximum, and most likely values of 1.473, 1.990, and 1. 732, 

~~~-· . 

3".3.2 Post-ANOPR Analysis 

Post ANOPR analyses will use a consistent set of assumptions for prices across all 

analyses sections (manufacturer impact, national benefits, and consumer impacts). · 

Manufacturer and retail price will be related by a fixed mark-μp of 1.40, as discussed in 

Section 2.0 of this document, and a sales tax mark-up of l .052 will be applied to arrive at 

the consumer price. 

Whereas the development of price scenarios for the manufacturer impact analysis will be 

determined at a later date, one possible approach that is being considered is the approach 

used in the 1991 Arthur D. Little report to·AHAM. This approach is discussed below: 

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For the detailed economic analyses conducted Post~ANOPR, manufacturer mark~ups will 

be deterinined by conducting financial analysis. The Government Regulatory Impact 

Model (GRIM) will be used to carry out the cash flow analysis. The GRIM is a standard . 

annual cash flow ap.alysis which uses price, quantity, and cost information to assess the. 

impact of regulatory coriditions on manufacturer income and cash flow. The model 

calculates the actual cash flo~s, by year, and then determines the present value of those 

cash flows, both without regulations and with regulations. 

The post'."'standard prices required in order to achieve several scenarios will be found by 

running the GRIM and treating manufacturer price as variable. Scenarios that will be 

considered include: · 

(a) What price (mark.;up) results in maintenance ofeurrent industry value? 

(b) What price (mark-up) would reduce industry value to zero? 

(c) What pri~e would result from pass-through of incremental material, labor, and 

overhead costs only? 

2117/98 14· 
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APPENDIX 1 

Retail mark-ups from past analyses (compared to suggested 1997 values) . · 

Consumer Products Efficiency 1.70 

Standards-· 19828 · 

Energy Conservation Standards .for 1.46 

·Consumer Products-1990 TSD9 

· 1991 AHAM Report-Impact ofH-Axis 1.475 · 

Standards10 . 

... s·~~2~~!~<l·;~!~i'i·:~~~k~~p-;· .. i99·::; ................ : ............. ····.-·:·········1·:4·73·rr·· .. ······-··1 

* These mark-ups were used to calculate the price that the consumers have to pay for . 

·purchasing dothes washers. Hence, the mark-ups i!1 this table include both the retail 

mark-ups and the sales tax mark-ups. 

8 1982 Engin~ring Analysis Document for Consumer Products Efficiency Standards. Markup over tot;il 

manufacturing cost. . 9 1990 TSD and DOE's comments on the Mark-ups for the final rule (pg. 22256, Federal Register/ 

Vol.56, No. 93/ Tuesday, May 14, 1991/ Rules and Regulations). Mark-up over long-term variable cost. 

1

° Financial Impact of DOE Top Loading Horizontal Axis Standards on U.S. Washing Machine 

Manufacturers, Report to Association of Home Appliance Manufacturers Horizontal Axis Task Force, 

July l991, Arthur D. Little, Inc. · · 11 1.40 x 1.052 

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APPENDIX 2

Clothes washer industry data

Summary of SEC 10-K reports of appliance manufactures:

Information from the 1992 Census of Manufactures (MC91-1-36B):

Industry: Household Laundry Equipment

2/17198 16
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APPENDIX 3

Clothes washer industry cost structure developed in Arthur D. Little's report to

AHAM 12

Profit before

Financing and

Tax

(7%)

SG&A

(16%)

Materials

(54%)

Overhead

'(11%) .

Labor

(12%)

Source: Public data on major appliance industry reviewed by washing machine

manufacturers

12 Source: "Financial Impact of DOE Top Loading Horizontal Axis Standards on Washing Machine

Manufacturers," July 1991.

2/17/98 17