Cigar Box method: Difference between revisions

Revision as of 13:48, 19 November 2012

Revision as of 14:03, 19 November 2012

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* CB5: cost price based value chain analysis,

* CB6: pyramid and sales analysis.

== Origins ==

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== History and Current Use ==

The method was first used in 1999 as an analytical tool during a course on [[foreign direct investment]] (FDI) at the [[Wageningen University]]. It analyzed the suitability, including a risk analysis and potential benefits, of specific agricultural production processes for foreign investors. Between 1999 and 20082012 over 150180 students were trained in the use of the Cigar Box Method. It has since developed into a fully fledged business analysis tool with multiple purposes and used by various targets groups: as analytical tool for foreign investors and bankers, as business planning tool for fruit and vegetable processing factories and business development service providers. An adapted version for women entrepreneurs in Africa has been developed recently. The method is described in the Agribusiness Handbook for Fruit and Vegetable Processing published by the [[Food and Agricultural Organization]] (FAO) <ref>[http://www.fao.org/docrep/012/al177e/al177e.pdf]</ref>. The Cigar Box is used frequently by [[Bakery Initiatives]] as a navigator to bakery profit. <ref>[http://www.bakery-initiatives.nl]</ref>.

== Profit Parameters ==

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The Cigar Box Method of profit calculation uses only five parameters:

P = Price (per unit),

VC = Variable cost (per unit),

FC = Fixed cost (per unitperiod),

q = Quantity, (in units per period)

tT = Tax (as % of profit).

More specifically, in (food)processing business, there are three types of [[Variable Cost]]: VC1 = Raw Materials and Ingredients, VC2 = costs of processing inputs into outputs, VC3 = costs of packaging materials. The [[Fixed Cost]] (FC) are also divided into three types: FC1 = depreciation of fixed assets, FC2 = interests paid, FC3 = overheads (salaries, transport, maintenance, marketing, ...). Using thethese 5 parameters and their sub-components in simple formulas, a trained person can do a Cigar Box MethodProfit analysis in half an hour, even. whenWhen data are missing -assumptions assumingcan educatedbe guessesmade regardinguing missingeducated dataguesses.

== Profit Calculation Methods ==

There are three different methods to calculate profit. All use the same parameters and lead to the same result.

1. = Bookkeeping method

Sales - Total cost

P*q - (VC*q + FC)

2. = Trader's method

Profit per unit * units sold

(P - VC - FC/q) * q

3. = Cigar Box method

Contribution - Fixed cost

(P - VC) * q - FC

More specifically, in (food)processing business, there are three types of [[Variable Cost]]: VC1 = Raw Materials and Ingredients, VC2 = costs of processing inputs into outputs, VC3 = costs of packaging materials. The [[Fixed Cost]] (FC) are also divided into three types: FC1 = depreciation of fixed assets, FC2 = interests paid, FC3 = overheads (salaries, transport, maintenance, marketing, ...). Using the 5 parameters and their sub-components in simple formulas, a trained person can do a Cigar Box Method analysis in half an hour, even when data are missing - assuming educated guesses regarding missing data.

== Excel ==