Here is a typical manuacturing model from “Health Canada” website.
Notice taxes taking $42.89 out of the proposed $53.01 wholesale price. This is a Canadian site and dollar amounts are Canadian. US and Canadian exchange rates at time of article (2002) are apporximately $1 Canadian $.63 US. Canadian taxes have typically been higher than US rates on tobacco products. Production costs in US are believed by many to be less due to superior automation and local tobacco farming.
“To analyse the impact of an ignition propensity standard on cigarette manufacturing costs, a baseline model of the cost structure of a representative cigarette manufacturer was developed. Exhibit 2 9 presents this model.
The figures in Exhibit 2 9 show that total manufacturing costs (i.e., before operating profits and taxes) for a representative cigarette manufacturer are approximately $5.70 per carton. Of this amount, materials comprise the major cost factor, while labour constitutes a relatively small portion of costs, reflecting the largely automated nature of cigarette production. Purchased leaf tobacco is the largest single cost input at $1.15 per carton, or more than 20 percent of total costs. Handling, transport and storage costs for tobacco at the early stage of production are also significant, at approximately 17 percent of total costs. Subsequent steps in the production process tobacco processing, plug making, and cigarette making together account for approximately 19 percent of total costs. Packaging and shipping costs represent 14 percent of the total, while general business expenses (which include building depreciation and overhead) account for the remaining 30 percent.
The model estimates operating profits of $4.43 per carton. Thus, operating profits represent approximately 44 percent of the before tax wholesale price of a carton of cigarettes. When taxes are taken into account, however, the price charged by manufacturers an estimated $10.12 per carton represents only 19 percent of the estimated wholesale price of $53.01 per carton.
Exhibit 2 9 Cost Structure of a Representative Cigarette Manufacturer
(2002 Canadian Dollars per Carton of 200 Cigarettes)
Labour Energy Materials Depreciation Total
Purchased Leaf Tobacco $1.152 $1.15
Handling, Transport and Storage $0.98
Tobacco Processing $0.00 $0 .032 $0.22
Plug Making (1) $0.081 $0.007 $0.326 $0.004 $0.42
Cigarette Making (2) $0.148 $0.014 $0.253 $0.036 $0.45
Packaging/Shipping (3) $0.220 $0.020 $0.511 $0.015 $0.77
Business Expenses $1.71
Operating Profits $4.43
Taxes (4) $42.89
Total Wholesale Price $53.01
(1) Materials cost includes filter materials, adhesives, paper wraps and flavourings.
(2) Materials cost includes paper, tipping materials, starch, adhesives and ink.
(3) Materials cost includes packets, foil, plastic wrap, tear tape, adhesives, cartons and cases.
(4) Includes Provincial Tobacco Tax, Federal Excise Tax and Federal Excise Duty.
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