Transcript Using the Cigar Box® Profit calculations made easy by Olivier van Lieshout

Using the Cigar Box®
Profit calculations made easy
by Olivier van Lieshout
Global Facts
www.globalfacts.nl
1
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
2
Contents CB1 training
1.
2.
3.
4.
The five profit parameters
Calculating profit
Filling the Cigar Box
Get a laptop and practice!
3
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.
4
How to calculate profit ?
PROFIT / LOSS
- Tax
(5)
REVENUES UP
REVENUES
P
(1)
x
q
(2)
-
COSTS
VC
(3)
+
FC
(4)
COSTS DOWN
1.
2.
3.
4.
5.
P
q
VC
FC
Tax
= price
= quantity sold
= variable cost (raw materials, processing, packaging)
= fixed cost
(depreciation, interests, overhead)
= taxes, duties (creative bookkeeping, connections, …)
5
Profit parameters
There are ONLY FIVE parameters
 P
Price (per unit)
 VC
Variable cost (per unit)
 q
Quantity (in units per period)
 FC
Fixed cost (per period)
 T
Tax % of profit (per period)
Note: q, FC, T must always refer to the same period.
But four can be influenced by the entrepreneur!
6
Profit parameter 1: Price
Price has many components:
Price
DDP Delivered, duties paid
DDU Delivered, duties unpaid
CIF Cost, Insurance, Freight
C&F Cost and Freight
DAF Delivered at Frontier
FOB Free on Board
EXW Ex Works
20
18
18
17
14
12
10
7
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 ?
8
Profit parameter 3: quantity

q
= actual quantity sold per period

qCAP = 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

qBE = break-even quantity, where profit = 0
9
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 ?
10
Recognize costs - exercise
Are the following Variable or Fixed costs?
1.
2.
3.
4.
5.
6.
7.
8.
Ingredients
Road tax
Labels
Bank charges
Machine repair
Raw material transport
Depreciation
Social tax
9.
10.
11.
12.
13.
14.
15.
16.
Diesel for the boiler
Electricity in the factory
Electricity in the office
Casual labor
Management salary
Detergents and gloves
Interest on loans
Carton boxes
11
Part 2
Calculating profit
Learning objectives:
1. Profit calculation formulas.
2. Difference bookkeeping and cost accounting.
12
How to calculate profit ?
PROFIT / LOSS
- Tax
(5)
REVENUES UP
REVENUES
P
(1)
x
q
(2)
-
COSTS
VC
(3)
+
FC
(4)
COSTS DOWN
1.
2.
3.
4.
5.
P
q
VC
FC
Tax
= price
= quantity sold
= variable cost (raw materials, processing, packaging)
= fixed cost
(depreciation, interests, overhead)
= taxes, duties (creative bookkeeping, connections, …) 13
Profit formula



Profit = Revenues – Total costs
Formula:
Profit = P*q – (VC*q + FC)
= Bookkeeping formula
“Total revenue, minus total cost is profit”
14
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”
15
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)
16
Comparison
Bookkeeping:
– (VC*q + FC) – T = PAT
P*q
per period
per period
per period
Cost accounting:
(P–VC)
Per unit
*q
– FC – T = PAT
per period
per period
per period
End result: is the same!
17
Why cost accounting?

Bookkeeping:

Year 1
A
P
100
q
15
Revenues 1500
Variable costs
Contribution
Fixed costs
Profit before tax
B
150
10
1500
C
200
10
2000
Total
Year 2
A
P
100
q
15
Revenues 1500
Variable costs
Contribution
Fixed costs
Profit before tax
B
150
20
3000
C
200
13
2600
Total

5000
4300
700
500
200
7100
6350
750
500
250
Profit yr 2: up 25%
Cost accounting:
Year 1
P
Variable cost/unit
Margin/unit
q
Contribution
Fixed costs
Profit before tax
A
100
80
20
15
300
B
150
160
-10
10
-100
C
Total
200
150
50
10
500
700
500
200
Year 2
P
Variable cost/unit
Margin/unit
q
Contribution
Fixed costs
Profit before tax
A
100
80
20
15
300
B
150
160
-10
0
0
C
Total
200
150
50
13
650
950
500
450

Profit yr 2: up 125%!
18
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
19
Profit calculation exercise 1
Scenario
P
q
Sales
VC
FC
FC/q
TC/q
Cost
Profit
base
10
10
100
5
30
3.0
8.0
80
20
q1
10
9
90
5
30
3.3
8.3
75
15
q2
10
8
80
5
30
3.8
8.8
70
10
p1
9
10
90
5
30
3.0
8.0
80
10
p2
8
10
80
5
30
3.0
8.0
80
0
vc1
10
10
100
6
30
3.0
9.0
90
10
vc2
10
10
100
7
30
3.0
10.0
100
0
fc1
10
10
100
5
40
4.0
9.0
90
10
fc2
10
10
100
5
50
5.0
10.0
100
0
20
Profit parameters (repetition)
There are ONLY FIVE parameters
 P
Price (per unit)
 VC
Variable cost (per unit)
 q
Quantity (in units per period)
 FC
Fixed cost (per period)
 Tax
Tax % of profit (per period)
Not more!
21
Part 3
Using the Cigar Box
Learning objectives:
1.
Filling the Cigar Box;
2.
Analyze the results!
3.
Importance of capacity utilization.
22
CIGAR BOX 1 - Tomato paste 25 Brix, aseptic bags of 220 kg in steel drums
USD
per ton
Price (DDP Moscow)
1,000
Total Revenue
Import duties, 10%
100
Total Cost
Transport, sales commission 3%
144
Profit Before Tax
Price (EXW)
756
Profitability %
P
Price (Raw Material, delivered factory)
Processing ratio
Raw Material cost
Other ingredients
VC1
71
6.0
429 70%
12 2%
441 72%
Production cost per hour (steam, electricity)
Production volume per hour (ton/hour)
VC2
124
2
62 10%
Cost of packing (aseptic bag, drum)
Number of drums per ton
VC3
21.8
4.5
99 16%
VC
FG losses %
VC
Gross margin
Gross margin %
P-VC
Variable cost
Fixed Cost / q
profit per
unit
profit
Asset value
Depreciation %
FC1
FC
USD
per year
2,721,600
2,554,377
167,223
6%
1,800,000
7.8%
140,000 41%
Debt (40% of Asset value)
Interest rate
FC2
720,000
18.7%
134,400 39%
Number of FTE employed
Salaries staff incl. social taxes
Other overhead, repairs, maintenance
FC3
15
50,000 15%
20,000 6%
70,000 20%
2.0%
614 100%
FC
FC % attributed to product
FC (attributed to product)
344,400 100%
100.0%
344,400
142
19%
Volume sold q (ton)
Contribution
3,600
511,623
614 87%
Break even volume (sales)
Break even volume (raw material)
96 13%
q
contribution
2,423
21,600
Break-even
Output capacity per hour in ton
2.0
Total Cost / q
710 100% Working hours per day
22
Length of harvesting season in days
110
Profit / q
46
Max. output capacity per year
4,840
Capacity utilization %
74.4%
Note: figures in blue are assumptions; figures in pink are calculated in another sheet; figures in black are formulas
Capacity Utilization
23
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.
Price (DDP Moscow)
Import duties, 10%
Transport, sales commission 3%
Price (EXW)
USD
per ton
1,000
100
144
756
100%
10%
14%
76%
24
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.
25
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.
Price (Raw Material, delivered factory)
Processing ratio (kg RM for 1 kg FG)
Raw Material cost
Other ingredients
VC1
71
6.0
429 70%
12 2%
441 72%
26
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
Production cost per hour (steam, electricity)
Production volume per hour (ton/hour)
VC2
124
2
62 10%
27
Packing cost
VC3

Packing cost are calculated per sales unit:


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:




1 aseptic bag in 1 steel drum = 3.2 + 18.6 = 21.8;
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
Cost of packing (aseptic bag, drum)
Number of drums per ton
VC3
21.8
4.5
99 16%
28
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
VC1 - Raw material & Ingredients
VC2 - Processing cost
VC3 - Primary & secondary packaging
441 72%
62 10%
99 16%
FG losses %
VC
2.0%
614 100%
29
Margin
P–VC


Margin, or gross margin, is expressed per unit:
Margin = P(EXW) – VC = 756 – 614 = 142
Price (EXW)
VC
756
614
Gross margin
Gross margin %
142
19%
30
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:
Margin %
Level
<15%
Very risky
15-25%
Risky
25-35%
35-45%
45-70%
>70%
Normal
Robust
Very robust
Unlikely
Comment
Only acceptable when the
production process parameters
and all prices are fully under
control.
Only acceptable if production
and price fluctuations are within
5-10% range.
Check your calculations again!
31
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
Gross margin
Gross margin %
142
19%
Volume sold q (ton)
Contribution
3,600
511,623
32
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…..
33
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
Asset value
Depreciation %
FC1
1,800,000
7.8%
140,000 41%
34
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
Debt (40% of Asset value)
Interest rate
FC2
720,000
18.7%
134,400 39%
35
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 = 3.3 FTE
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
Number of FTE employed
Salaries staff incl. social taxes
Other overhead, repairs, maintenance
FC3
15
50,000 15%
20,000 6%
70,000 20%
36
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
FC1 - depreciation
FC2 - interest
FC3 - overhead
140,000 41%
134,400 39%
70,000 20%
FC
FC % attributed to product
FC (attributed to product)
344,400 100%
100.0%
344,400
37
Profit
Two methods



Cost accounting method: Profit = Contribution – Fixed costs
Bookkeeping method: Profit = Total revenues – Total costs
Result is the same!
Cost accounting method
Cost accounting method
Contribution
Contribution
Fixed costs
Fixed costs
Profit before Tax
Profit before Tax
Bookkeeping method
Bookkeeping method
Total Revenue
Total Revenue
Total Cost
Total Cost
Profit before Tax
Profit before Tax
Profitability %
Profitability %
USD
USD
per year
per year
511,623
511,623
344,400
344,400
167,223
167,223
USD
USD
per year
per year
2,721,600
2,721,600
2,554,377
2,554,377
167,223
167,223
6%
6%
38
Summary
Cost price

Cost price = total cost per unit
Variable Cost per unit (VC)
614 87%
Fixed Cost per unit (FC/q)
96 13%
Total Cost per unit (VC+FC/q)
710 100%
Price (EXW)
756
Profit per unit (P-VC-FC/q)
46 6%
39
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?
Break even volume (sales)
Break even volume (raw material)
2,423
21,600
40
Capacity

q
= quantity sold = 3,600 tons of paste per year

qCAP = 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 / qCAP * 100% = 3,600 / 4,840 = 74.4%
Volume sold q (ton)
3,600
Output capacity per hour in ton
Working hours per day
Length of harvesting season in days
Max. output capacity per year
Capacity utilization %
2.0
22
110
4,840
74.4%
41
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
TC2 = VC + FC/q2
= 24 + 2400 / 100 =
= 24 + 2400 / 120 =
48
44
With same P, lower TC  higher profit per unit


Profit 1 = Price – TC1
Profit 2 = Price – TC2
= 60 – 48 =
= 60 – 44 =
12
16
42
Capacity utilization 2
How does Capacity utilization affect the Profit ?

higher capacity utilization  more units are sold
and higher profit per unit.

Profit =




Profit 1 =
Profit 2 =
Increase
Increase %
units sold * profit per unit
100
120
20
20%
*
*
12
16
4
33%
=
=
1200
1920
720
60%
Conclusion: with 20% increase in volume,
the profit increases by 60%!!
43
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.
44
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/
45
Melted cheese
from powder
46
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
47
Recipe and
Investment
1
2
3
4
8
Ingredient
CDLF Instant Gouda Flavor
Base powder FCMP (DDP)
Water
BATCH
1
2
3
4
5
6
7
8
Recipe
Cost per Kg Cost in batch
5.5 kg
14.40
79.22
20.0 kg
4.75
95.00
30.6 kg
0.05
1.53
56.10 kg
175.75
Investment
Mix & smelt unit
Inline homogeniser
UHT pasterurizer
Cup filler (4800/hr)
Utilities
Building
Price EUR
60,000
15,000
65,000
105,000
130,000
250,000
BATCH
625,000
%
10%
10%
10%
10%
10%
5%
Depreciation
6,000
1,500
6,500
10,500
13,000
12,500
8.0%
50,000
%
45.1%
54.1%
0.9%
0.0%
0.0%
100.0%
48
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!
49
CIGAR BOX 1 - Gouda Melted Cheese, (sterilized 4800 cups/hour) in cups of 150gr, 12 per carton box (1.8 kg)
per ton
Price (Retail price, delivered)
5,800
Total Revenue
VAT 6%
328
Total Cost
Transport cost
100
Profit Before Tax
Price (EXW)
5,372
Profitability %
Price (Gouda CDLF, DDP factory)
Processing ratio
Raw Material cost
Other ingredients, DDP factory
VC1
Production cost per hour (gas, electricity)
Production volume per hour (ton/hour)
VC2
Cost of packing (cup, seal, label, box)
Number of bags per ton
VC3
FG losses %
VC
Gross margin
Gross margin %
Variable cost
Fixed Cost / q
16,579
0.10
1,625 37%
1,721 39%
3,346 76%
10.71
0.48
22 0.5%
1.70
556
944 21%
2.0%
4,399 100%
973
18%
4,399 89%
Nov-10
per year
2,148,679
1,983,537
165,142
8%
Asset value
Depreciation %
FC1
625,000
8.0%
50,000 22%
Debt (40% of Asset value)
Interest rate
FC2
250,000
15.0%
37,500 17%
Number of FTE (8hr/day) employed
Salaries staff incl. social taxes
Other overhead, repairs, maintenance
FC3
12
86,400 39%
50,000 22%
136,400 61%
FC
FC % attributed to product
223,900 100%
100.0%
FC (attributed to product)
223,900
Volume sold q (ton)
Contribution
400
389,042
Break even volume (sales)
Break even volume (raw material)
230
39
560 11%
Output capacity per hour in ton
Total Cost / q
4,959 100% Operating hours per day
Working days per year
Profit / q
413
Max. output capacity per year
Capacity utilization %
Note: figures in blue are assumptions; figures in pink are calculated in another sheet; figures in black are formulas
0.48
8
250
962 50
41.6%