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### . , 

## 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

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### 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-ANOPR Analysis
....................................................................... · .... 13 3.3.2 Post-ANOPR Analysis
..............:...............................:......................... 13 Appendices 1. Retail mark-ups from pastanalyses".
..............**~** .......:...........................· .....:.............. 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: 

### Thefollowing figure illustrates the representativeprices andmark-ups for a typical vertical axis clotheswasher beingsoldin 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


### Toperform Pre-ANOPR analysis, the Depar:tmentproposes a 2-step mark-up approach where: {a} the manufacturing costs (i.e.,fullproduction costs) are markedup to the manufacturerprice usinga manufacturermark-up; and (b) 

### ·the manufacturerprice is . markedup by a retail mark-up to a"ive at the retailprice. Thepricepaidby the consumer includes the sales tax in addition to the retailprice. This sales tax is accounted for by using a sales tax mark-up over the retailprice of the clothes washer. The Departmentproposesa fixed retail mark-up of 1.40, anda fixedmark-up of 1.052 to cover the sales tax. The manufacturermark-up over fullproduction costs will be boundby a maximum value of 1.35which maintains industry (manufacturer) cost structure, and.a.minimum value of 1.00 which represents apass-through of full production costs includingdepreciation of new capital butno recuperation ofnonproduciion costs.

, Basedon the information qbove, the totalmark-up fromfullprQduction costs to consumerprice varies from a minimum of1.473 to a maximum of 1.990. The fJePirtmentproposes to characterize the totalmark-up usinga triangulardistribution

' . 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 of0.817 

### (AH.AM baseline). Currently no data exists that would allow the Department to associate sales information on the basis ofthe 

### MEF descriptorto be Used,in the present rulemakin,g. In the · absence ofspecific 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 ofthe baseline unit cost has no impact on LCC and payback**analy~is.'** The absolute**~alue** ofthe baseline unit cost is important, however, ifprice survey information is used to compare prices derived from a mark-up overcost with prices observed in the market.


### 2117/98 

### 1DRAFT with the above statedminimum andmaximum values anda most likely value which is the average of the two extremes. , This total inark
..updistribution will be usedby the Department asa means of estimating', future coniumerprices of clothes washers. , '

. . . . Section 1 of this document

### pre~ents a discussion on retail mark-ups, presentingcurrent andhistorical retail mark-ups for clothes washers. Section· 2presentsa brief disC,ussion on sales tax andits effect on consumerprice, Section 3 outlines the Department's methodology/or estimatingmanufacturer mark-up$. 

### 1.0 Retail Mark-ups 

### The objective ofthis section is to estimate the manufacturer price-to-retail price mark-up for clothes washers from the available sources ofprice information: 1,.1 Background



### .One measure ofthe effect ofappliance efficiency standards on the consumers is the change (increase) in the purchase price ofthe 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 ofhigher purchase prices. It 

### is important to identify what proportion ofthe 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.:.throughjustifies a less stringent standard from a manufacturer impact standpoint; and has the opposite effect of . lowering consumer life-cycle costs thatjustif1es 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 ofdothes washers include: (1) Consumer Expenditure Surveys, conducted by the Bureau ofLabor Statistics in conjunction with the Bureau ofCensus '(2) Dealerscope Merchandising's Annual Statistical Surveys. (3) ELCAP price database
2/.17/98 2DRAFT
Sources ofinfonnation for the manufacturer price ofclothes 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 ofthe data collection procedures and the characteristics ofeach ofthese 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 oftwo sources for manufacturer price, thereby resulting in.six different sets cifestimates

### fo~ retail

### mark-up~. Section 1.5 presents an analysis offinancial statements (SEC 

### 10-l< reports) ofa few appliance retailers to get an under&tanding ofgross 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 oftwo 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 ofCensus under contract with the Bureau ofLabor 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 offrequently 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 ofclothes 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 oftime 1986 througn 1994. 2**T~bl~** 1 also_shows the**re~ail** price ofthese 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 ofclothes washers m all the 

## .so states, a shipmentwe.ighted average sale.s tax of5.2% was calculated).

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

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### 3 

## ,. DRAFT

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 ofconsumer 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 ofvendors and dealers. Dealerscope reports contain one-year and five-year unit shipments industrywide and the retail value ofthese 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** 

### oftheir own brand ofmerchandise. Table 2 provides the ,retail price ofclothes washers estimated from the statistical reviews. The estimated retail value ofclothes 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 ofretailers-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 ofthe CIR program is to produce timely, accurate data on production and shipments ofselected 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 ofshipments 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 mostreports annually and reconciles the estimates to the broader-based annual survey ofmanufactures and the census of. manufactures. The census ofm.anufactures provides a complete list ofall 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 ofmandatory 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 ofshipments represent physical shipments ofall ·products**sold~** transferred to other establishme.nts ofthe 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 ofcompany overhead and profit. Products bought and resold without further manufacture are excluded. · Table 4 provides the estimated manufacturer price ofclothes washers. The value ofthe clothes washers shipped from factories is divided by the quantity ofshipments 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 ofHome Appliance Manufacturers) Fact Book.is a· comprehensive collection offacts defining the

# u.s..major home appliance industry, its.

. ' 

### market and its products. The Association lists.both: • the total manufacturers' sales ofcl.othes washers (excludes freight charges or · extended warranty costs), and • the industry unit shipments (domestic and**expo~s)** 

### orclothes 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 

# 6shows 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 ConsumerExpenditure Surveys conducted by the Bureau of Labor Statistics, and manufacturer price information from the Current Industrial Reports prepared by the Bureau ofCensus.

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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. Forthe period 1986 through 1996, the average retail mark-up varies·from a minimum of 1.33 (in 1995) to a maximum of1.62 (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) (ELCAP) (ELCAP) 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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### 7.\ DRAFT 

# 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-upsestimated.from different data soun:es. 

### 1.5 Retail mark-ups estimated

### from SEC's flnanCia1 Statements 

### Infonnation relating to the gross margins (orgross profit) ofappliance retailers canbe obtained from theit S EC I0-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 ofthese retailers sell electronics and home office equipment · along with household appliances. The margins in Table 8represent the average ofthe 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.'sandother 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 bygrowing the appliance part oftheirbusiness and by putting greateremphasis on the sale ofextended 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 ofelectronics, home office equipment and major appliances. · '.Source: Standard and Poor's Stock Repons on Circuit City Stores andJ;lestBuy. 5 Source: Standard and Poor's StockRepons on BestBuy. 6Retail mark-up: 100/(100-Gro ss margin). Mark-up forcloehes washers (appliances) should be higher**~ven** the product mix: , 2117/98 

## . a.,1 ·DRAFT**Typi~ally** 

### in the retail industry, gross profits, as**r~ported.in** 

### SEC**lO~K** 

### statements, are obtained by subtracting the 'cost ofsales' 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 ofthe: · · • price that the retailers· pay to the manufacturers for buying the goops, ; • costs involved in the process ofbuying the goods from manufacturers (these might include some transportation costs, administration and labor costs), and · • ·costs ofmaintaining and operating warehouses where the goods are stocked after they are.bought from manufacturers. Fr.om the above description ofgross 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 ofthe net sales or revenues are not available. , 2.0 Sales Tax 

### Consumers pay sales tax in addition to the retail price at the time ofpurchasing 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 ofthese.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 ofprice 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 of5.2%.on top ofthe 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 1.475 used In the 1991 report to AHAM entitled

"Financial.Impact ofDOE Top Loading.Horizontal Axis Standards on U.S. Washing Machine Manufacturers." Hence, the Department ofEnergy proposes using a retail mark-up of1.40, 

### and a sales tax mark-up of1.052 

### to arrive at the consumer price (or the clothes washer rulemaking analysis. · 2117/98 

### 9DRAFT 

### 3.0 ""Manufacturer Mark-ups
. The.objective ofthis· 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 ofhigher 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 ofthe 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 ofa 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 ofManufactures**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 ofthe 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).



### 2/17/98 10DRAFT.

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 ofthe price is based on the assumption that in order to earn a satisfactory return, revenues from the sale ofgoods (and hence the ·manufacturerprice) 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 33.5
Table 9. Manufacturing cost of a baseline· clothes**was~er** estimated from the industry cost structure 

### The full production cost ofa 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 ofa product. The full production cost is the sum ofthe direct ·material cost, the direct labor cost, and the overhead cost which includes depreciation (-3.5% 

### ofrevenues). 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 asthe full production oost of the goods sold.

. '

·Figure 4. The components offull cost of a product.
Baseline manufacturer mark-up is defined as the increase in price over the full production cost ofa baseline clothes washer, and is calculated as:

. ManufacturerPrice Baselme 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 ofthe product is high enough (I) to**recov~r** the full cost ofthe product and (2) to yield a satisfactory profit. Such a price is called a 

### normalprice. 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," ManagementAccounting,'July 1983, pp. 30-36.) 

### 2/17/98 

### 12DRAFT 

### 3.3 ManufacturerPrice and Mark-ups for Different Efficiency.Levels 

### 3.3.1 'Pre-ANOPR Analysis Forthe 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 ofnew capital expenditures, There is, however, no recuperation ofincremental 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 ofassumptions 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 ofthis document, and a sales tax mark-up ofl .052 

### will be applied to arrive at the consumer price. Whereas the development ofprice 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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### DRAFT
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 ofregulatory coriditions on manufacturer income and cash flow. The model calculates the actual cash**flo~s,** 

### by year, and then determines the present value ofthose 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 ofincremental material, labor, and overhead costs only?

2117/98 14·DRAFT 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 ·

Standards 10

. 

# ...**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 ofDOE Top Loading Horizontal Axis Standards on U.S. Washing Machine Manufacturers, Report to Association ofHome Appliance Manufacturers Horizontal Axis Task Force, July l991, Arthur D. Little, Inc. · · 11 1.40 x 1.052 2117/98 

### 15-* H 

### DRAFT 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 16DRAFT 

### 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 ofDOE Top Loading Horizontal Axis Standards on Washing Machine Manufacturers," July 1991. 2/17/98 17