CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

TABLE OF CONTENTS

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

6.1.1 Baseline Markups................................................................................................. 6­2
 

6.1.2 Incremental Markups........................................................................................... 6­3
 

6.1.3 Overall Markups .................................................................................................. 6­4
 

6.2	 BASIC ASSUMPTIONS USED TO ESTIMATE WHOLESALER AND

MECHANICAL CONTRACTOR MARKUPS ................................................................. 6­5

6.3	 ESTIMATION OF WHOLESALER MARKUPS ............................................................. 6­6
 

6.4	 ESTIMATION OF MECHANICAL CONTRACTOR MARKUPS.................................. 6­7
 

6.4.1 Estimation of Mechanical Contractor Markup Probability Distribution ............. 6­8
 

6.5	 SALES TAX ....................................................................................................................... 6­9
 

6.6	 NATIONAL ACCOUNTS ............................................................................................... 6­11
 

6.7	 OVERALL MARKUPS.................................................................................................... 6­12
 

6.8 RESULTS ......................................................................................................................... 6­13
 

REFERENCES .......................................................................................................................... 6­14
 

LIST OF TABLES

Table 6.1.1 Distribution Channel Shares................................................................................ 6­2
 

Table 6.3.1 Wholesaler Expenses and Markups..................................................................... 6­6
 

Table 6.4.1 Mechanical Contractor Expenses and Markups................................................... 6­8
 

Table 6.5.1 State Sales Tax Rates......................................................................................... 6­10
 

Table 6.5.2 National Average Weighted Sales Tax Rates, based on Estimated
 

Commercial Refrigeration Equipment Shipments by State ............................... 6­10

Table 6.7.1 Baseline Markups by Distribution Channel and Overall Weighted Average

Markup, Including the Weighted Average Sales Tax Multiplier for

Supermarkets...................................................................................................... 6­12

Table 6.7.2 Incremental Markups by Distribution Channel and Overall Weighted

Average Markup, Including the Weighted Average Sales Tax Multiplier

for Supermarkets................................................................................................ 6­12
 

LIST OF FIGURES

Figure 6.1.1 Distribution Channels and Shares for Commercial Refrigeration

Equipment............................................................................................................ 6­1

Figure 6.4.1 Cumulative National Sales­Weighted Distribution of Mechanical

Contractor Markups for Commercial Refrigeration Equipment Sales to

Supermarkets........................................................................................................ 6­9

Figure 6.5.1 Cumulative National Sales­Weighted Distribution of Sales Tax Rates for

Commercial Refrigeration Equipment Sales to Supermarkets .......................... 6­11
 

6­i

 EE-2006-STD-0126 COMMENT 23.2
6­ii

 EE-2006-STD-0126 COMMENT 23.2
            

                         

                             

                    

                   

                            

                            

                         

                              

                           

                    

                            

                           

                          

                                

                             

                                  

                     

                              

                           

                    

                               

                   

                  

       

   

   

CHAPTER 6. MARKUPS FOR EQUIPMENT PRICE DETERMINATION

6.1 INTRODUCTION

To carry out the life­cycle cost (LCC) calculations described in Chapter 8, the

U.S. Department of Energy (DOE) needed to determine the cost to the customer of baseline

commercial refrigeration equipment (CRE). This cost was determined for both baseline

equipment and more­efficient equipment the customer would purchase following the

promulgation of new standards. However, the customer price of such equipment is not known

since it depends on how the equipment is purchased. What is known is the manufacturer’s

selling price (MSP) for both baseline equipment and the more­efficient equipment as determined

in the Engineering Analysis (Chapter 5). By applying a multiplier called a “markup” to the

MSP, DOE was able to estimate the customer price of equipment purchased through various

distribution channels. This chapter describes how DOE derived the markups.

The cost to the customer depends on how the customer purchases the equipment. DOE

defined three distribution channels, as shown in Figure 6.1.1, to describe how the equipment

passes from the manufacturer to the customer. In the first distribution channel, the manufacturer

sells the equipment directly to the customer through a national account. In the second and third

distribution channel, the manufacturer sells the equipment to a wholesaler, who in turn may sell

it directly to the customer or through a mechanical contractor. The wholesaler in this case can be

a refrigeration wholesaler focusing on refrigeration equipment, or a grocery warehouser (supply

chain distributor) who sells food and store equipment to the retailer. Table 6.1.1 gives the

distribution channel shares (in percentage of total sales) through each of the three distribution

channels for remote­condensing and self­contained equipment. The distribution channel shares

are based on estimates provided by Carrier Corporation to DOE during the public review of the

Advanced Notice of Public Rulemaking (ANOPR) for commercial refrigeration equipment.

Manufacturer

National Account

Customer Customer

Wholesaler or Wholesaler Distribution

Mechanical Contractor

(New Construction or Replacement)

Customer

Figure 6.1.1 Distribution Channels and Shares for Commercial Refrigeration Equipment
 

6­1

 EE-2006-STD-0126 COMMENT 23.2
          

     

       

   

       

                       

                   

      

             

                

             

       

                       

                       

      

     

                       

                       

       

                   

                           

                         

                              

                     

   

                           

               

Table 6.1.1 Distribution Channel Shares
 

Remote Condensing Equipment

New and Replacement

Construction

National Account Distributor Contractor

70% 15% 15%

Self­Contained Equipment

New and Replacement

Construction

National Account Distributor Contractor

30% 35% 35%

The following equation describes how DOE determined the equipment price if a

customer purchases directly from the manufacturer through a national account:

EQPCUST = MFGBASE x MUNATL ACCT x (1+ ST) Eq. 6.1

where:

EQPCUST = equipment price to the customer ($),
 

MFGBASE = manufacturer selling price of baseline equipment ($),
 

MUNATL ACCT = national account markup,
 

ST = sales tax rate.
 

The following equation describes how DOE determined the equipment price if a

wholesaler sells the equipment to the customer through the wholesaler distribution channel:

EQPCUST = MFGBASE x MUWHOLE x (1+ST) Eq. 6.2

where:

MUWHOLE = wholesaler markup

The following equation describes how DOE determined the equipment price if a

mechanical contractor sells the equipment to the customer through the wholesaler distribution

channel:

EQPCUST = MFGBASE x MUWHOLE x MUMECH CONT x (1+ ST) Eq. 6.3

where:

MUMECH CONT = residential and light commercial mechanical contractor markup

The markup multiplier to the equipment price is thus lessened for shorter distribution channels.

For each of the markups presented above, DOE further differentiated between a baseline

markup and an incremental markup, as described below. The overall markup is then the product

of all the markups plus sales tax within a distribution channel.

6.1.1 Baseline Markups

DOE defined baseline markups as cost multipliers that relate the purchase cost to selling

price for each step of the distribution channel.

6­2

 EE-2006-STD-0126 COMMENT 23.2
                           

         

                     

                              

                     

             

   

                 

           

                     

                      

                  

                    

                       

               

   

                     

                           

                             

                           

                       

                     

                       

                        

                     

    

               

If sold to a customer by the manufacturer through a national account, the following

equation defines the equipment price:

EQPNATL ACCNT BASE = MFGBASE x MUNATL ACCT BASE x (1+ST) Eq. 6.4

where:

EQPNATL ACCNT BASE	 = national account price to the customer of baseline equipment ($),

MUNATL ACCT BASE = national account markup on baseline equipment.

If sold to a customer by a wholesaler­distributor:

EQPWHOLE BASE = MFGBASE x MUWHOLE BASE x (1+ST) Eq. 6.5

If sold to a customer by a mechanical contractor:

EQPMECH CONT BASE = EQPWHOLE BASE x MUMECH CONT BASE Eq. 6.6

where:

EQPWHOLE BASE

EQPMECH CONT BASE

MUWHOLE BASE

MUMECH CONT BASE

= wholesaler price of baseline equipment ($),

= mechanical contractor price of baseline equipment ($),

= wholesaler markup on baseline equipment,

= mechanical contractor markup on baseline equipment.

The use of the markups results in the wholesaler (EQPWHOLE BASE) and mechanical

contractor (EQPMECH CONT BASE) prices of baseline CRE equipment.

6.1.2 Incremental Markups

Incremental markups are cost multipliers that relate incremental changes in the

manufacturer selling price of higher efficiency equipment that result, in this case, from efficiency

improvements, to changes in the wholesaler or contractor sales price, as shown in the following

equations:

If sold to a customer by the manufacturer through a national account, the following

equation defines the increase in equipment price above that of baseline equipment:

EQPNATL ACCNT INCR = MFG INCR x MUNATL ACCT INCR x (1+ST)	 Eq. 6.7

where:

EQPNATL ACCNT INCR	 = incremental equipment price to the national account customer

($),

MFG INCR	 = change in the manufacturer selling price of higher efficiency

equipment brought about by an increase in efficiency due to new

standards ($),

MUNATL ACCT INCR	 = national account incremental markup.

6­3

 EE-2006-STD-0126 COMMENT 23.2
                               

     

   

               

               

                  

              

               

                        

                 

                          

                   

   

   

                     

                         

                         

               

       

                             

               

       

           

                            

                   

                            

                   

             

              

         

                       

   

If sold by a wholesaler directly to a customer, or by a mechanical contractor after passing

through a wholesaler:

EQPWHOLE INCR = MFGINCR x MUWHOLE INCR x (1+ ST) Eq. 6.8

EQPMECH CONT INCR = EQPWHOLE INCR x MUMECH CONT INCR Eq. 6.9

where:

EQPWHOLE INCR = incremental wholesaler price ($),
 

EQPMECH CONT INCR = incremental mechanical contractor price ($),
 

MUWHOLE INCR = incremental wholesaler markup,
 

MUMECH CONT INCR = incremental mechanical contractor markup.
 

In these equations MUNATL ACCTINCR, MUWHOLE INCR and MUMECH CONT INCR refer to the

incremental national account, incremental wholesaler, and incremental mechanical contractor

markups, respectively, which are applied to the incremental MSP. The use of the incremental

markups results in the incremental wholesaler (EQPWHOLE INCR) and incremental mechanical

contractor (EQPMECH CONT INCR) prices.

6.1.3 Overall Markups

Overall markups, including both overall baseline and overall incremental markups, relate

the manufacturer selling price to the customer price as indicated by the following equations:

EQPCUST BASE = MFGBASE x (WTNATL ACCNT BASE x MUNATL ACCT BASE + WTWHOLE BASE x MUWHOLE

BASE+ WTMECH CONT BASE x MUWHOLE BASE x MUMECH CONT BASE) x (1+ST)

= MFGBASE x MUOVERALL BASE Eq. 6.10

EQPCUST INCR = MFGINCR x (WTNATL ACCNT INCR x MUNATL ACCT INCR + WTWHOLE INCR x MUWHOLE

INCR+ WTMECH CONT INCR x MUWHOLE INCR x MUMECH CONT INCR) x (1+ST)

= MFGINCR x MUOVERALL INCR Eq. 6.11

EQPCUST= EQPCUST BASE+ EQPCUST INCR Eq. 6.12

where:

MUOVERALL BASE = overall weighted baseline markup that is the product of all the

weights and baseline markups for each step of the distribution

channel,

MUOVERALL INCR = overall weighted incremental markup that is the product of all the

weights and incremental markups for each step of the distribution

channel,

EQPCUST BASE = baseline customer price ($),
 

EQPCUST INCR = incremental customer price ($),
 

EQPCUST = total customer price ($),
 

WTNATL ACCNT BASE = weight (percent) of baseline equipment sales through national
 

accounts,

WTWHOLE BASE = weight (percent) of baseline equipment sales through wholesalers,

6­4

 EE-2006-STD-0126 COMMENT 23.2
                       

     

   

   

  

     

   

                           

                        

                           

                           

         

         

                     

                      

                             

                          

                     

                   

                        

                     

                                

                              

                       

                           

         

                              

                               

                       

                       

       

                               

                           

                        

                         

                     

                     

                        

                           

WTMECH CONT BASE = weight (percent) of baseline equipment sales through mechanical

contractors,

WTNATL ACCNT INCR = weight (percent) of higher efficiency equipment sales through

national accounts,

WTWHOLE INCR = weight (percent) of higher efficiency equipment sales through

wholesalers,

WTMECH CONT INCR = weight (percent) of higher efficiency equipment sales through

mechanical contractors.

The use of the overall baseline and overall incremental markups results in the baseline

customer price (EQPCUST BASE) and the incremental customer price (EQPCUST INCR). For a particular

higher efficiency level that increases manufacturer selling price of equipment, the total price of

equipment to the customer (EQPCUST ) is the sum of the baseline customer price (EQPCUST BASE)

and the incremental customer price (EQPCUST INCR).

6.2	 BASIC ASSUMPTIONS USED TO ESTIMATE WHOLESALER AND

MECHANICAL CONTRACTOR MARKUPS

DOE derived the wholesaler and mechanical contractor markups from three key

assumptions about CRE costs. DOE based the wholesaler markups on industry balance­sheet

data and based the mechanical contractor markups on U.S. Census Bureau data for the plumbing,

heating, and air conditioning (PHAC) industry.1 DOE obtained the industry balance sheet data

from the Heating, Airconditioning & Refrigeration Distributors International (HARDI), the trade

association representing wholesalers of refrigeration and heating, ventilating, and air

conditioning (HVAC) equipment. DOE put the U.S. Census Bureau Plumbing, Heating, and

Air­Conditioning Contractors data that was used for developing mechanical contractor markups

into the same format as the balance sheet data for wholesalers. These balance sheets break out

the components of all costs incurred by firms that supply and install PHAC equipment. The

three key assumptions used to estimate markups using these financial data are:

1.	 The firm balance sheets accurately represent the various average costs incurred by firms

distributing and installing CRE equipment.

2.	 The wholesaler and contractor costs can be divided into two categories: (1) costs that

vary in proportion to the MSP of CRE equipment (variable costs); and (2) costs that do

not vary with the manufacturer selling price of CRE equipment (fixed costs).

3.	 Wholesaler and contractor prices vary in proportion to wholesaler and contractor costs

included in the balance sheets.

In support of the first assumption, the balance sheets itemize firm costs into a number of

cost categories, including direct costs to purchase or install the equipment, operating labor and

occupancy costs, and other operating costs and profit. Although wholesalers and contractors

tend to handle multiple commodity lines (including air conditioners, furnaces, and boilers) the

data provide the most accurate available indication of CRE equipment costs.

Previous DOE analysis of the HVAC wholesalers, contractors, and consultants, including

information obtained from the trade literature, support the second assumption.2,3 This analysis

indicates that wholesaler and contractor markups vary according to the quantity of labor and

6­5

 EE-2006-STD-0126 COMMENT 23.2
                             

                          

                             

                          

                                

                           

                              

       

                         

                       

                               

                            

                          

                    

                                 

   

                       

                          

                       

                            

                          

                             

                            

                                

                                

                                

                         

                           

            

         

         

   

                 

       

         

             

                 

                     

                            

materials used to distribute and install appliances, with markups on labor tending to be much

larger than markups on materials. The analysis implies that these distribution channel markups

vary more in relation to sales volume than in relation to other factors, including appliance

efficiency. Distribution channel labor inputs also vary more with sales volume than with

appliance cost or efficiency. DOE assumed a division of costs between those that do not scale

with the manufacturer selling price (labor and occupancy costs), and those that do (operating

costs and profit). This division of costs led to the estimate of wholesaler and mechanical

contractor markups described below.

In support of the third assumption, the HVAC wholesaler and contractor industry is

competitive and customer demand for commercial heating and air conditioning is relatively

inelastic, i.e., the demand is not expected to decrease significantly with an increase in price of

equipment. The large number of wholesaler firms listed in the 2002 Census indicates the

competitive nature of the market. For example, there are almost 1,400 wholesalers of

refrigeration equipment, and 87,000 HVAC contractors.4 Following standard economic theory,

competitive firms facing inelastic demand either set prices in line with costs or quickly go out of

business.5

6.3 ESTIMATION OF WHOLESALER MARKUPS

Wholesalers report median data in a confidential survey that HARDI conducted of

member firms.6 In the survey, HARDI itemizes revenues and costs into cost categories,

including direct equipment expenses (cost of goods sold), labor expenses, occupancy expenses,

other operating expenses, and profit. It reports data for various industry segments, including the

Controls and Refrigeration industry segment in terms of industry median values. DOE presents

these data for Controls and Refrigeration in terms of specific types of expense within these

categories in Appendix C. Table 6.3.1 summarizes these expenses as cost per dollar sales

revenue in the first data column. As shown in this column, the direct equipment expenses (cost

of goods sold) represent about $0.70 per dollar sales revenue. In other words, for every $1

wholesalers take in as sales revenue, they use $0.70 to pay the direct equipment costs. Labor

expenses account for $0.20 per dollar sales revenue, occupancy expenses account for $0.03,

other operating expenses account for $0.04, and profit accounts for $0.03 per dollar sales

revenue.

Table 6.3.1 Wholesaler Expenses and Markups*

Description

Wholesale Firm Expenses or Revenue

Per Dollar

Sales Revenue

Per Dollar Cost

of Goods Sold

Direct Cost of Equipment Sales: Cost of goods sold

Labor Expenses: Salaries and benefits

Occupancy Expense: Rent, maintenance, and utilities

Other Operating Expenses: Depreciation, advertising, and insurance

Profit

$0.70

$0.20

$0.03

$0.04

$0.03

$1.00

$0.28

$0.05

$0.06

$0.04

Baseline Markup (MUWHOLE BASE): Revenue per dollar cost of goods sold 1.43

Incremental Markup (MUWHOLE INCR): Increased revenue per dollar increase cost of goods sold 1.10

* Source: Heating, Airconditioning & Refrigeration Distributors International. 2005. 2005 Profit Report (2004 Data).

6­6

 EE-2006-STD-0126 COMMENT 23.2
                             

                                

                               

                                

                             

                             

                                  

                         

                              

                               

                                  

                             

                                 

                                  

                           

                                

                               

                              

                       

     

                         

                                

                          

                              

                               

                               

                                

                            

                                 

                                

                            

   

                       

                 

                    

                     

                            

                         

                            

                               

                              

                               

                            

The last column of Table 6.3.1 shows the data converted from costs per dollar revenue

into revenue per dollar cost of goods sold. DOE did this conversion by dividing each cost

category in the first data column of Table 6.3.1 by $0.70 (i.e., equipment expenditure per dollar

revenue). The data in the last column show that, for every $1.00 the wholesaler spends on

equipment costs, the wholesaler earns $1.00 in sales revenue to cover the equipment cost, $0.28

to cover labor costs, $0.05 to cover occupancy expenses, $0.06 for other operating expenses, and

$0.04 in profits. This totals to $1.43 in sales revenue earned for every $1.00 spent on equipment

costs. Therefore, the wholesaler baseline markup (MUWHOLE BASE) is 1.43 ($1.43 ÷ $1.00).

DOE also used the data in the last column to estimate the incremental markups. The

incremental markup depends on which of the costs in Table 6.3.1 are variable and which are

fixed. For example, for a $1.00 increase in the manufacturer equipment price, if all of the other

costs scale with the manufacturer selling price (i.e., all costs are variable), the increase in

wholesaler price will be $1.43, implying that the incremental markup is 1.43, or the same as the

baseline markup. However, if none of the other costs are variable, then a $1.00 increase in the

manufacturer selling price will lead to a $1.00 increase in the wholesaler price, for an

incremental markup of 1.0. DOE assumes that the labor and occupancy costs will be fixed and

that the other operating costs and profit will scale with the manufacturer selling price (i.e., be

variable). In this case, for a $1.00 increase in the manufacturer selling price, the wholesaler

price will increase by $1.10, giving a wholesaler incremental markup (MUWHOLE INCR) of

1.10 ($1.10 ÷ $1.00).

DOE recognizes that there is a possibility of case­to­case deviation in the markups

developed from the above financial data. Based on the analysis of U.S. Census Bureau data for

wholesalers, DOE calculated a standard deviation of 4.2 percent. DOE assumed that the

variation determined for the baseline markup applied to the incremental markup as well. For the

baseline markup of 1.43, a standard deviation of 4.2 percent translates into an absolute value of

0.06 and for the incremental markup of 1.10, a standard deviation of 4.2 percent translates into

an absolute value of 0.05. However, the national data on distribution of CRE units suggests that

only about 14 percent of new units sold actually pass through wholesalers. The case­to­case

deviation of wholesale markup thus has a very small impact on the overall cost of equipment and

can be neglected. DOE applied the same baseline and incremental markup to all sales of CRE

units passing through wholesalers. Further details of these data are shown in Appendix C.

6.4 ESTIMATION OF MECHANICAL CONTRACTOR MARKUPS

DOE derived markups for mechanical contractors from U.S. Census Bureau data for

Plumbing, Heating, and Air­Conditioning Contractors (PHAC) (North American Industry

Classification System 238220). This sector includes establishments primarily engaged in

installing and servicing plumbing, heating, and air­conditioning equipment, which may include

new work, additions, alterations, maintenance, and repairs. The U.S. Census Bureau data for the

PHAC sector include detailed statistics for establishments with payrolls, similar to the data

reported by HARDI for wholesalers. The primary difference is that the U.S. Census Bureau

reports itemized revenues and expenses for the PHAC industry as a whole in total dollars rather

than in typical values for an average or representative business. Because of this, DOE assumed

that the total dollar values that the U.S. Census Bureau reported, once converted to a percentage

basis, represented revenues and expenses for an average or typical contracting business. As with

6­7

 EE-2006-STD-0126 COMMENT 23.2
                         

                                 

                                

                        

                             

             

                             

                                      

                         

                                 

                            

                                

                     

              

     

     

         

   

                  

            

            

              

       

                    

                        

                                  

       

                                   

                                

                                 

                             

                                  

                               

                                  

                                  

                               

                     

     

           

                         

                          

                       

                         

                          

the data for wholesalers, Table 6.4.1 summarizes the expenses for mechanical contractors, as

expenses per dollar sales revenue, in the first data column (Appendix C contains the full set of

data). The direct cost of sales represents about $0.66 per dollar sales revenue to the mechanical

contractor. Labor expenses account for $0.17 per dollar sales revenue, occupancy expenses

account for $0.02 per dollar sales revenue, other operating expenses account for $0.03, and profit

makes up $0.12 per dollar sales revenue.

DOE converted these expenses per dollar sales into revenue per dollar cost of goods sold,

by dividing each figure in the first data column by $0.66. The data in the last column show that,

for every $1.00 the mechanical contractor spends on equipment costs, the mechanical contractor

earns $1.00 in sales revenue to cover the equipment cost, $0.26 to cover labor costs, $0.03 to

cover occupancy expenses, $0.05 for other operating expenses, and $0.18 in profits. This totals

$1.52 in sales revenue earned for every $1.00 spent on equipment costs. This results in a

mechanical contractor baseline markup (MUMECH CONT BASE) of 1.52 ($1.52 ÷ $1.00).

Table 6.4.1 Mechanical Contractor Expenses and Markups*

Description

Mechanical Contractor Firm

Expenses or Revenue

Per Dollar

Sales Revenue

Per Dollar Cost

of Goods Sold

Direct Cost of Equipment Sales: Cost of goods sold

Labor Expenses: Salaries (indirect) and benefits

Occupancy Expense: Rent, maintenance, and utilities

Other Operating Expenses: Depreciation, advertising, and insurance

Net Profit Before Taxes

$0.66

$0.17

$0.02

$0.03

$0.12

$1.00

$0.26

$0.03

$0.05

$0.18

Baseline Markup (MUWHOLE BASE): Revenue per dollar cost of goods sold 1.52

Incremental Markup (MUWHOLE INCR): Increased revenue per dollar increase cost of goods sold 1.23

* Source: U.S. Census Bureau. 2002. Plumbing, Heating, and Air­Conditioning Contractors: 2002. Report EC02­231­238220, Table 4. Detailed

Statistics for Establishments: 2002.

DOE was also able to use the data in the last column in Table 6.4.1 to estimate the

incremental markups by being able to separate the fixed and variable costs. For example, if all

of the other costs scale with the equipment price (i.e., all costs are variable), the increase in

mechanical contractor price will be $1.52, implying that the incremental markup is 1.52, or the

same as the baseline markup. However, if none of the other costs are variable, then a $1.00

increase in the equipment price will lead to a $1.00 increase in the mechanical contractor price,

for an incremental markup of 1.0. DOE assumes the labor and occupancy costs to be fixed and

the other operating costs and profit to scale with the equipment price (i.e., be variable). In this

case, for a $1.00 increase in the equipment price, the mechanical contractor price will increase by

$1.23, giving a mechanical contractor incremental markup (MUMECH CONT INCR) of

1.23 ($1.23 ÷ $1.00).

6.4.1 Estimation of Mechanical Contractor Markup Probability Distribution

Mechanical contractor costs differ in various regions of the country for reasons including

availability of labor, cost of living, union versus non­union workforce, and others. Because

many mechanical contractor costs differ systematically by state, DOE characterized the markups

developed from U.S. Census Bureau data with a probability distribution based on a state­by­state

analysis of U.S. Census Bureau data for PHAC contractors. The state­by­state analysis provided

6­8

 EE-2006-STD-0126 COMMENT 23.2
                              

                       

                          

                             

                           

                  

                     

                       

  

     

   

               

           

   

                               

                              

                             

                              

                                 

                   

                               

                                  

                             

  

                         

                                      

                           

                        

a distribution on the relative markups of mechanical contractors in the United States. DOE then

applied the State­level index to the single­point baseline and incremental markups calculated

above to create State­level markups. Because the state­by­state distribution of CRE units varies

by type of customer (e.g., supermarkets may be more prevalent relative to convenience stores in

one part of the country than another), a national­level distribution of the mechanical contractor

markup index is different for each class of building.

Figure 6.4.1 shows the cumulative probability distribution of the State markup index that

DOE used to characterize the mechanical contractor baseline and incremental markups for

supermarkets.

Mechanical Contractor Markups for Supermarkets

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1.35 1.4 1.45 1.5 1.55 1.6 1.65 1.7

Markup

Cumulative Percentage

Mechanical Contractor

Markup for Supermakets

Figure 6.4.1	 Cumulative National Sales­Weighted Distribution of Mechanical Contractor

Markups for Commercial Refrigeration Equipment Sales to Supermarkets

6.5 SALES TAX

The sales tax represents State and local sales taxes that are applied to the customer price

of CRE units. The sales tax is a multiplicative factor that increases the customer equipment

price. DOE derived sales taxes representative of the combined State and local sales tax rates

from the Sales Tax Clearinghouse,7 shown in Table 6.5.1. The State level combined tax rates

can be applied to the estimated value of State level CRE equipment shipments to obtain the total

purchase cost to the customer located in any state.

The distribution of sales tax rates ranges from a minimum of zero percent to a maximum

of 9.4 percent with a mean value of 6.8 percent. DOE applied sales taxes to the customer

equipment price irrespective of the distribution channel and the market in which the customer is

located.

A weighted­average national level sales tax rate is calculated by multiplying the shares of

state level shipments for each of the four sectors by the tax rates in Table 6.5.1. This provides a

weighted national average sales tax rate for the four sectors based estimated CRE equipment

sales to each of the four sectors as shown in Table 6.5.2.

6­9

 EE-2006-STD-0126 COMMENT 23.2
            

   

   

   

   

   

   

     

   

   

   

     

     

     

   

     

     

           

     

     

                     

         

       

   

     

   

   

   

   

     

   

   

     

   

                       

                           

                             

      

                           

                

Table 6.5.1 State 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 8.05% Kentucky 6.00% North Dakota 5.50%

Alaska 1.15% Louisiana 8.60% Ohio 6.75%

Arizona 7.65% Maine 5.00% Oklahoma 8.15%

Arkansas 8.00% Maryland 5.00% Oregon 0.00%

California 7.95% Massachusetts 5.00% Pennsylvania 6.25%

Colorado 6.15% Michigan 6.00% Rhode Island 7.00%

Connecticut 6.00% Minnesota 6.70% South Carolina 5.80%

Delaware 0.00% Mississippi 7.00% South Dakota 5.25%

Dist. of Columbia 5.75% Missouri 6.85% Tennessee 9.40%

Florida 6.70% Montana 0.00% Texas 7.95%

Georgia 6.90% Nebraska 6.30% Utah 6.45%

Hawaii 4.00% Nevada 7.50% Vermont 6.00%

Idaho 5.05% New Hampshire 0.00% Virginia 5.00%

Illinois 7.55% New Jersey 6.00% Washington 8.45%

Indiana 6.00% New Mexico 6.55% West Virginia 6.00%

Iowa 6.60% New York 8.25% Wisconsin 5.40%

Kansas 6.95% North Carolina 7.05% Wyoming 5.35%

Table 6.5.2 National Average Weighted Sales Tax Rates, based on Estimated

Commercial Refrigeration Equipment Shipments by State

Supermarkets

and Grocery

Stores

(44511)

Convenience

and Specialty

Stores (44512,

4452, and 4453)

Gasoline

Stations with

Convenience

Stores (44711)

Warehouse

Clubs and

Supercenters

(45291)

Weighted Sales

Tax Rate by

Retail Sector

6.77% 6.66% 6.81% 6.73%

Weighted Sales

Tax Rate all

Retail Sectors

6.76%

Because the state­by­state distribution of CRE units varies by type of customer

(e.g., supermarkets may be more prevalent relative to convenience stores in one part of the

country than another), a national­level distribution of the sales tax markups is different for each

class of building.

Figure 6.5.1 shows the cumulative probability distribution of the state tax rates that DOE

used to characterize sales tax markups for supermarkets.

6­10

 EE-2006-STD-0126 COMMENT 23.2
           

       

   

                   

       

  

                       

                          

                       

                        

                             

                           

                     

                         

                              

                             

                                        

                           

                         

                               

                          

                   

                       

                            

                             

                           

                                

                          

                         

                           

                          

Sales Tax Rates, CRE Sales to Supermarkets

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%

Combined State and Local Rates

Cumullative Percent of

Equipment Sales

Sales Tax Rates

Figure 6.5.1	 Cumulative National Sales­Weighted Distribution of Sales Tax Rates for

Commercial Refrigeration Equipment Sales to Supermarkets

6.6 NATIONAL ACCOUNTS

Equipment purchased through national accounts constitutes about 86 percent of the usual

distribution of CRE equipment to customers. Large customers of CRE equipment use national

accounts to circumvent the typical distribution channel, thereby allowing them to negotiate

significantly lower equipment prices directly with the manufacturer. The manufacturer in turn

must cover additional expenses related to the distribution (as opposed to the manufacture) of the

equipment, but gains in terms of negotiating agreed upon sales volumes with the customer.

To capture the price savings realized from equipment purchased through national

accounts, DOE derived a national account markup, assuming that the resulting equipment price

increase was one half of that realized from a distribution through the wholesaler channel. In

other words, if the price increase resulting from the wholesaler markups is $100, the national

account markup is such that the price increase is one­half of that, or $50. DOE based the use of a

national account markup that is one­half of that realized from the wholesaler distribution channel

on the assumption that the resulting national account equipment price must fall somewhere

between the manufacturer selling price (i.e., a markup of 1.0) and the customer price under the

wholesaler distribution channel. Because DOE did not know typical values for the actual

national account equipment price, it chose a value of one­half.

To illustrate the development of the national account markup further, this section

provides the following example of how DOE derived it. For example, using a baseline

manufacturer selling price of $1,000 for a CRE unit delivered to a supermarket and baseline

wholesaler markups of 1.436, the resulting baseline customer equipment price for sales through a

wholesaler (without sales taxes) is $1,436 ($1,000 x 1.436). The dollar value increase due to the

above distribution channel markups is $436 ($1,436 ­ $1,000). Under the assumption that

national account customers realize equipment price increases equal to one­half of that through

the wholesale distribution channel, the dollar value of the equipment price increase under the

national account is $218 (one­half of $436). The resulting equipment price is $1,218

6­11

 EE-2006-STD-0126 COMMENT 23.2
                         

                            

         

                   

                             

                              

                            

                               

                            

                       

                        

                     

                 

     

   

   

   

                   

                   

     

   

   

                         

                          

                             

($218 + $1,000), which results in a deduced national account baseline markup of approximately

1.218 ($1,218 ÷ $1,000). A similar calculation results in a deduced national account incremental

markup of 1.054 ($1,054 ÷ $1,000).

6.7 OVERALL MARKUPS

DOE multiplied the wholesaler, mechanical contractor, and national account markups

described above by the weighted average sales tax multiplier to obtain the overall baseline and

incremental markups shown in Table 6.7.1 and Table 6.7.2 DOE based overall markups on one

of three distribution channels according to how the equipment is purchased: through a national

account; a wholesaler; or a wholesaler and a mechanical contractor, and the State into which the

CRE unit is delivered. Table 6.7.1 presents three overall markups for the overall baseline

markup for both remote­condensing and self­contained equipment, and Table 6.7.2 presents the

same information for overall incremental markups for supermarkets, as an example.

Table 6.7.1	 Baseline Markups by Distribution Channel and Overall Weighted Average

Markup, Including the Weighted Average Sales Tax Multiplier for

Supermarkets

Wholesaler

Mechanical

Contractor

(Includes

Wholesaler)

National Account

(Mfg Direct)

Overall Weighted Average

Markup

RemoteCondensing

Equipment

Self­Contained

Equipment

Distributor(s)

Markup

1.436 2.182 1.218 1.395 1.631

Sales Tax

Multiplier

1.068 1.068 1.068 1.068 1.068

Overall

Markup

1.533 2.330 1.300 1.490 1.742

Table 6.7.2	 Incremental Markups by Distribution Channel and Overall Weighted

Average Markup, Including the Weighted Average Sales Tax Multiplier for

Supermarkets

Wholesaler

Mechanical

Contractor

(Includes

Wholesaler)

National Account

(Mfg Direct)

Overall Weighted Average

Markup

RemoteCondensing

Equipment

SelfContained

Equipment

Distributor(s)

Markup

1.107 1.362 1.054 1.108 1.180

Sales Tax

Multiplier

1.068 1.068 1.068 1.068 1.068

Overall

Markup

1.182 1.454 1.125 1.183 1.260

DOE used the overall markups to estimate the customer price of baseline equipment,

given the manufacturer cost of baseline equipment. For example, if the manufacturer selling

price of a baseline remote­condensing CRE unit is $1,000, DOE can multiply this by the

6­12

 EE-2006-STD-0126 COMMENT 23.2
                         

                            

                             

                          

                           

                         

   

                          

                         

                        

         

weighted­average overall baseline markup to estimate that the baseline customer price of the

CRE unit sold is $1,490. Similarly, DOE used the overall incremental markup to estimate

changes in the customer price, given changes in the manufacturer selling price above the baseline

due to increases in equipment efficiency. For example, if a new standard for remote­condensing

equipment increases the CRE manufacturer selling price by $100, DOE can multiply this price

($100) by the weighted­average overall incremental markup (1.183) to estimate a customer price

increase of $118.

6.8 RESULTS

The overall baseline and overall incremental markups are presented in section 6.7. These

markups will be used with the MSPs to generate customer prices for commercial refrigeration

equipment. Supporting data for the calculation of baseline and incremental markups are

provided in Appendix C.

6­13

 EE-2006-STD-0126 COMMENT 23.2
                     

   

                     

                  

                             

                   

                       

     

             

                     

       

               

REFERENCES

1 U.S. Census Bureau. 2002. Plumbing, Heating and Air­Conditioning Contractors (PHAC):

2002. Report EC­02­231­238220.

2 Lawrence Berkeley National Laboratory (LBNL) 2004. An Analysis of Price Determination

and Markups in the Air­Conditioning and Heating Equipment Industry. LBNL­52791.

3 Mark Metoyer as reported in Mark Skaer, “What should you charge? Try These Tested

Formulas,” Air Conditioning, Heating and Refrigerator News, March 26, 2001.

4 U.S. Census Bureau. 2002. Electrical, Hardware, Plumbing, and Heating Equipment and

Supplies: 2002. Report EC­02­421­17.

5 Pindyck, R. and D. Rubinfield. 2000. Microeconomics, Prentice­Hall.

6 Heating, Air Conditioning & Refrigeration Distributors International (HARDI). 2005. 2005

Profit Report (2004 Data).

7 The Sales Tax Clearinghouse. Accessed https://thestc.com/STRates.stm.

6­14

 EE-2006-STD-0126 COMMENT 23.2