1. 1 Using the Cigar Box® Profit calculations made easy by Olivier van Lieshout Global Facts www.globalfacts.nl

2. 2 Cigar Box method CB1: cost price for one single product CB2: cost price for a range of products CB3: cost price monitoring on a daily basis CB4: investment analysis CB5: value chain analysis

3. 3 Contents CB1 training 1. The five profit parameters 2. Calculating profit 3. Filling the Cigar Box 4. Get a laptop and practice!

4. 4 Part 1 The five profit parameters Learning objectives: 1. There are only five profit parameters. 2. Difference variable and fixed costs. 3. Difference bookkeeping and cost accounting.

5. 5 How to calculate profit ? 1.P = price 2.q = quantity sold 3.VC = variable cost (raw materials, processing, packaging) 4.FC = fixed cost(depreciation, interests, overhead) 5.Tax= taxes, duties(creative bookkeeping, connections, …) PROFIT / LOSS REVENUES - COSTS - Tax (5) q (2) P (1) VC (3) FC (4) x+ REVENUES UP COSTS DOWN

6. 6 Profit parameters There are ONLY FIVE parameters PPrice (per unit) VCVariable cost (per unit) qQuantity (in units per period) FCFixed cost (per period) TTax % of profit (per period) Note: q, FC, T must always refer to the same period. But four can be influenced by the entrepreneur!

7. 7 Profit parameter 1: Price Price has many components: Price

8. 8 Profit parameter 2: VC Variable cost has three main components: VC VC 1 Cost of raw materials and ingredients VC2 Cost of processing inputs into outputs VC3 Cost of packaging Primary, secondary, tertiary Where to obtain correct data ?

9. 9 Profit parameter 3: quantity q=actual quantity sold per period q CAP =quantity at full capacity utilization quantity/hour * hours/day * days/year (harvest season) 3 ton/hour * 22 hours/day * 90 days/yr = 5940 ton/year q BE =break-even quantity, where profit = 0

10. 10 Profit parameter 4: FC Fixed cost also has three main components: FC FC1 Depreciation of fixed assets FC2 Interest paid on capital FC3 Overhead salaries, repairs, transport, marketing, etc Where to obtain correct data ?

11. 11 Recognize costs - exercise 1. Ingredients 2. Road tax 3. Labels 4. Bank charges 5. Machine repair 6. Raw material transport 7. Depreciation 8. Social tax 9. Diesel for the boiler 10. Electricity in the factory 11. Electricity in the office 12. Casual labor 13. Management salary 14. Detergents and gloves 15. Interest on loans 16. Carton boxes Are the following Variable or Fixed costs?

12. 12 Part 2 Calculating profit Learning objectives: 1. Profit calculation formulas. 2. Difference bookkeeping and cost accounting.

13. 13 How to calculate profit ? 1.P = price 2.q = quantity sold 3.VC = variable cost (raw materials, processing, packaging) 4.FC = fixed cost(depreciation, interests, overhead) 5.Tax= taxes, duties(creative bookkeeping, connections, …) PROFIT / LOSS REVENUES - COSTS - Tax (5) q (2) P (1) VC (3) FC (4) x+ REVENUES UP COSTS DOWN

14. 14 Profit formula Profit = Revenues – Total costs Formula: Profit = P*q – (VC*q + FC) = Bookkeeping formula “Total revenue, minus total cost is profit”

15. 15 Profit formula 2 Profit = Contribution – Fixed costs Contribution = Margin per unit * Units sold Formula: Profit = (P – VC) * q – FC = Cost accounting formula “Price less variable cost is the margin per unit, multiplied by the number of units is the contribution, minus fixed cost is profit”

16. 16 Margin and contribution Margin = earnings per unit Margin = price minus variable cost per unit Margin = P – VC Contribution = earnings per period Contribution = margin per unit * units sold Contribution = (P – VC) * q or Contribution = revenues – total variable cost Contribution = P * q – VC(total)

17. 17 Comparison Bookkeeping: P*q – (VC*q + FC) – T = PAT per periodper period per period Cost accounting: (P–VC) * q – FC – T = PAT Per unit per period per period per period End result: is the same!

18. 18 Why cost accounting? Bookkeeping: Cost accounting: Profit yr 2: up 25% Profit yr 2: up 125%!

19. 19 Sensitivity analysis Despite fluctuations in P, q, VC and FC…. Total cost must be less than revenues Contribution must be more than the fixed cost Profit before tax > 10% Break-even volume must be assured in sales in supply of the most important raw material

20. 20 Profit calculation exercise 1 Scenario PqSalesVCFCFC/qTC/qCostProfit base10 1005303.08.08020 q1109905303.38.37515 q2108805303.88.87010 p1910905303.08.08010 p2810805303.08.0800 vc110 1006303.09.09010 vc210 1007303.010.01000 fc110 1005404.09.09010 fc210 1005505.010.01000

21. 21 Profit parameters (repetition) There are ONLY FIVE parameters PPrice (per unit) VCVariable cost (per unit) qQuantity (in units per period) FCFixed cost (per period) TaxTax % of profit (per period) Not more!

22. 22 Part 3 Using the Cigar Box Learning objectives: 1. Filling the Cigar Box; 2. Analyze the results! 3. Importance of capacity utilization.

23. 23 P VC FC q contribution profit P-VC profit per unit Break-even Capacity Utilization

24. 24 Sales price P Sales Price = Amount per unit, INCO-term City. Tomato paste price = USD 1000 per ton, DDP Moscow. DDP = delivered, duties paid. Delivered to Moscow in this case. The import duties in Russia are 10% or USD 100 per ton. Transport and commission amount to USD 144 per ton. Hence the Price EXW = 1000-100-144 = USD 756 per ton.

25. 25 Variable cost VC Three types of variable cost: VC1, cost of everything which is consumed: raw material and ingredients. VC2, cost of processing raw material into the finished product: energy, steam, casual labor, detergents, diesel, gas. VC3, cost of primary (jar, cap, label) and secondary (carton box, shrink wrap, pallet) packing material.

26. 26 Raw material & ingredients VC1 The price of the raw material, delivered to the factory = 71/ton. The processing ratio is the quantity of raw material needed for one unit of finished good. Here: 6 kg tomato for 1 kg of paste. Raw material cost = 71 * 6 = 429 The higher the losses, the higher the processing ratio, the more costly the finished good. Calculate the cost of all other ingredients in the recipe: 12 VC1 = 429 + 12 = 441.

27. 27 Processing cost VC2 Calculating VC2 is not easy. Processing cost are calculated per hour. And divided by the production volume in units per hour. To arrive at the processing cost per unit. One must measure the use of steam, electricity, casual labor. Not just guess it! And measure the output per hour. Not just guess it! Get the correct data! After that, calculation is easy: 124 / 2 = 62

28. 28 Packing cost VC3 Packing cost are calculated per sales unit: 1 aseptic bag in 1 steel drum = 3.2 + 18.6 = 21.8; Other examples of sales units: 24 bottles per carton = 24*(bottle + cap + label) + 1 box + 1 sticker; 10 sachets per bag = 10*sachet + 1 bag + 1 adhesive sticker Calculate the number of sales units per unit of calculation: unit of calculation is ton = 1000 kg 4.4 drums of 225 kg per ton: 1000 / 225 = 4.4 add the packing losses, say 2.2%, multiply 4.4 by 102.2% = 4.5 VC3 = cost of packing * number of packs per unit = 21.8 * 4.5 = 99

29. 29 Total variable cost VC VC = VC1 + VC2 + VC3 Finished good losses Warehouse losses, theft, pilferage, etc…. If there are 2% losses, enter 2% in FG losses % box. VC = (VC1 + VC2 + VC3) * (1+ FG losses %) VC = (441 + 62 + 99) * 1.02 = 614

30. 30 Margin P–VC Margin, or gross margin, is expressed per unit: Margin = P(EXW) – VC = 756 – 614 = 142

31. 31 Margin % (P–VC) / P * 100% Margin % = Margin / P(EXW) * 100% = 142 / 756 = 19% Margin % helps us to evaluate, if a margin is risky or not. Usual risk levels in food processing and manufacturing are:

32. 32 Contribution (P–VC) * q The volume, or quantity sold is expressed in units per period. In this example, 3600 ton of tomato based are sold. Contribution is expressed per period: Contribution = Margin per unit * quantity per period = = 142 * 3600 = 511,623

33. 33 Fixed costs Three types of fixed cost: FC1, cost of investments: depreciation. FC2, cost of debts: interest. FC3, cost of all overheads. Salaries, social taxes, pensions, etc.. Repairs, maintenance Office & transport cost Marketing Etc…..

34. 34 Depreciation FC1 Use a realistic value for the productive assets. For a tomato processing company this is about 1.8 million. Use a realistic depreciation rate. Here: the replacement period of the factory is 12.8 years. The depreciation = 1 / 12.8 * 100% = 7.8% FC1 = Asset value * depreciation % = 1,800,000 * 7.8% = 140,000

35. 35 Interest FC2 Use the real amount of the debts, with a minimum of 40% of the asset value. For this company this is about 720,000 Use a realistic interest rate. Here: 18.7% per year. FC2 = Debt value * interest rate = 720,000 * 18.7% = 134,400

36. 36 Overhead FC3 Enter the number of full-time equivalent staff (FTE) 10 workers, working 6 months per year = 10 * 6/12 = 5 FTE 10 workers, working 4 months per year = 10 * 4/12 = Calculate their salaries, incl. all taxes and emoluments: 50,000 Calculate one lump sum amount for all other overheads: 20,000 FC3 = salaries + all other overhead = 50,000 + 20,000 = 70,000 3.3 FTE

37. 37 Total fixed costs FC FC = FC1 + FC2 + FC3 FC = 140,000 + 134,400 + 70,000 = 344,400 The contribution of tomato paste must exceed these costs. In case more than 1 product is produced, FC must be shared. Calculate FC % attributed to product and enter in the box: 100% FC (attributed to product) = FC * FC % attributed to product

38. 38 Profit Two methods Cost accounting method: Profit = Contribution – Fixed costs Bookkeeping method: Profit = Total revenues – Total costs Result is the same!

39. 39 Summary Cost price Cost price = total cost per unit

40. 40 Break-even Break-even point is where the profit is zero. Revenues – Cost = 0 or Contribution – Fixed cost = 0 Why calculating the break-even quantity? When Price, VC and FC are known and q is unknown How many drums can be sold per year? BE volume (sales) = minimum volume needed to sell to make a profit. BE volume (raw material) = minimum volume needed to process. How much raw material do we need to buy?

41. 41 Capacity q = quantity sold = 3,600 tons of paste per year q CAP = quantity produced at full capacity utilization quantity/hour * hours/day * days/year (harvest season) 2 ton/hour * 22 hours/day * 110 days/yr = 4,840 ton/year utilization = q / q CAP * 100% = 3,600 / 4,840 = 74.4%

42. 42 Capacity utilization How does Capacity utilization affect Cost Price? Higher utilization %  higher q  lower FC/q VC does not change, hence lower cost price TC: TC1 = VC + FC/q1= 24 + 2400 / 100 =48 TC2 = VC + FC/q2= 24 + 2400 / 120 =44 With same P, lower TC  higher profit per unit Profit 1 = Price – TC1 = 60 – 48 = 12 Profit 2 = Price – TC2 = 60 – 44 = 16

43. 43 Capacity utilization 2 How does Capacity utilization affect the Profit ? higher capacity utilization  more units are sold and higher profit per unit. Profit = units sold * profit per unit Profit 1 = 100*12=1200 Profit 2 = 120*16=1920 Increase 20 4 720 Increase %20%33% 60% Conclusion: with 20% increase in volume, the profit increases by 60%!!

44. 44 Part 4 Practice Learning objective: 1. Each person, with own laptop and CB1 installed, able to obtain correct data from the sources provided and fill in into CB1 2. Able to carry out a series of sensitivity tests.

45. 45 Crème de la Ferme Logical Food Technologies B.V. has developed Crème de la Ferme. Crème de la Ferme is an instant cheese powder consisting of fresh natural healthy traceable ingredients. The powder is a mixture of milk powder and natural or natural identical flavors. The instant cheese powder is dissolved in hot water and pasteurized, which gives a stable healthy cheese spread that should be hot-filled and sealed. With the use of a base and flavor powder a variety of cheese flavors can be produced easily. Crème de la Ferme cheese base powder is supplied in 25 kg bags and the cheese flavor powder is supplied in 2,5 kg bags. The bags are made of a multi-layer paper with a poly inner liner. The base and flavor powders are mixed with 110 – 125% water. This gives the client the possibility to produce cheese spread locally at a very competitive price. Cheddar, Gouda, Emmentaler, Parmesan Goat cheese, Mozzarella, Camembert Feta, Cream cheese Local licensees / purchasers of Crème de la Ferme have opportunity to add local herbs, spices, etc to enlarge their product range. Cost for freight, local legislative requirements, import duties, certification for Halal, Kosher, or GOS are charged extra. http://www.cdlf.nl/

46. 46 Melted cheese from powder

47. 47 Production and Filling Production takes place in batches of 50-80 kg. Batch processing time is 7 minutes, or about 8-9 batches per hour. During one batch, the equipment consumes about €1,25 in steam and electricity. Six workers are needed per 8 hour shift. The product can be sold at €5,80 per kg in the shop. The filler can do 4,800 cups per hour. Cup size can vary from 100 to 250 gram. The price for a cup, seal and label is: 100 gram = €0,085 150 gram = €0,10 A carton box takes: 100 gram = 18 cups 150 gram = 12 cups Box + label cost €0,50

48. 48 Recipe and Investment

49. 49 CB1 Fill in the data Gouda Melted Cheese in 150 gram cups. Fill in the Cigar Box using the data above. Make your own assumptions where needed. Time needed: Experienced person: 5 minutes Learner: ?? Good luck!

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