Regulatory Proposal for Reducing Fire Risks from Cigarettes

Appendix A

Baseline Cost Structure of a Representative Cigarette Manufacturer

This appendix outlines the development of the baseline cigarette-manufacturing cost model.  This model was derived from the cigarette manufacturing cost structure reported by Lago and Shannon in a report for the government's Technical Study Group on Cigarette and Little Cigar Fire Safety.⁹¹  This cost structure, in disaggregate form, is presented in Exhibit A-1.

Exhibit A-1 is based in part upon relative allocation factors calculated in James Morris' report: "This Tobacco Business Part XIII: Manufacturing Costs of Cigarettes."⁹²  These allocation factors are shown in Exhibit A-2.  Morris used international survey data from cigarette manufacturers to compile these allocation factors.  Thus, the disaggregate cost structure presented in Exhibit A-1 represents an international industry average.

The figures presented in Exhibit A-1 indicate costs stated in 1986 U.S. dollars per 1,000 cigarettes.  These figures were converted to Canadian dollars using the Purchasing Power Parity Index (PPPI), inflated to 2002 values using the Canadian Consumer Price Index (CPI), and adjusted to reflect costs for a carton of 200 cigarettes.⁹³  Exhibit A-3 presents the results of these adjustments.

To develop an aggregate cost model, the figures in Exhibit A-3 were grouped into categories representing the major steps in the cigarette manufacturing process.  The categories are indicated by numbers in parentheses (i.e., 1 through 9, in the column labelled "Group").  To update the taxation category (shown in Line 7, "Federal Excise Tax"), the data in Exhibit A-4 were used.  Note that while Federal Excise Tax and Federal Excise Duty are both constant across provinces, Provincial Tobacco Tax rates vary.  Thus, the provincial rates were averaged and added to the federal taxes to calculate total taxes.  The new category "Taxes" is reported by itself in Group 9, and is shown as a separate line item in Exhibit A-5, which presents the baseline cigarette manufacturing cost model in aggregate form.

Exhibit A-1 - Disaggregate Cost Structure of Cigarette Manufacturing Operations
(1986 U.S. Dollars per 1,000 Cigarettes)

	Cost Categories
	Labour	Energy	Materials	Depreciation	Total
Purchased Leaf Tobacco			2.930		2.930
Carrying, Processing and Storage			--		2.820
Receiving					0.085
Storage					2.296
Dispatch					0.085
Transport to Plant					0.023
Stemming				0.016	0.331
Plant Operations	1.285	0.115	2.790	0.206	4.396
Tobacco Storage	0.026	0.003			0.029
Vacuum Process	0.002			0.002	0.004
Flue-Cured Line	0.004			0.002	0.006
Barley/Maryland Line	0.005			0.004	0.009
Oriental Line	0.003			0.001	0.004
Reconstituted Tobacco	0.073	0.007		0.039	0.119
Blending	0.001			0.002	0.003
Casing	0.002		0.016	0.001	0.019
Cutting	0.003			0.002	0.005
Crushed Rolled Stem	0.005			0.001	0.006
Drying & Cooling	0.003			0.003	0.006
Bulking	0.016	0.001		0.008	0.025
Plug Making	0.206	0.019	0.830	0.011	1.066
Cigarette Making	0.376	0.035	0.644	0.092	1.147
Packaging	0.539	0.048	1.300	0.036	1.923
Shipping	0.010	0.001			0.011
Quality Control	0.011	0.001		0.002	0.014
Total Manufacturing Costs	$1.285	$0.115	$5.720	$0.222	$10.146
Building Depreciation				0.037	0.037
Overhead and Transport					0.558
Advertising					3.750
Federal Excise Tax					8.000
TOTAL COSTS					$22.490
Operating Profits					11.260
TOTAL WHOLESALE PRICE					$33.750

Source: Sumner, et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, 59.

Exhibit A-2 - Relative Allocation Factors for Manufacturing Costs

Operation	Percent of Total Cost
Stemmery (Total)	4.52
Warehouse
Receiving	1.16
Storage	31.31
Dispatch	1.16
Transportation	0.30
Plant
Tobacco Store	1.22
Vacuum Process	0.11
Flue Cured Line	0.19
Burley/Maryland Line	0.25
Oriental Line	0.14
Reconstituted Tobaccos	3.52
Blending	0.07
Casing (top)	0.09
Cutting	0.14
Crush Rolled Stem	0.26
Drying & Cooling	0.14
Bulking	0.77
Plug Making	9.87
Cigarette Making	18.00
Packaging (total)	25.78
Shipping	0.48
Quality Control	0.52
Total	100.00

Source: Morris, James E., 1980, "This Tobacco Business Part XIII: Manufacturing Costs of Cigarettes," Tobacco International 182 (26) pp. 47-52.

Exhibit A-3 - DISAGGREGATE COST STRUCTURE OF CIGARETTE MANUFACTURING OPERATIONS (2002 Canadian Dollars per 200 Cigarettes)

		Cost Categories
Group		Labour	Energy	Materials	Depreciation	Total
(1)	Purchased Leaf Tobacco			1.152		1.152
	Carrying, Processing and Storage					1.109
(2)	Receiving					0.033
(2)	Storage					0.903
(2)	Dispatch					0.033
(2)	Transport to Plant					0.009
(3)	Stemming				0.006	0.130
	Plant Operations	0.505	0.045	1.097	0.081	1.728
(3)	Tobacco Storage	0.010	0.001			0.011
(3)	Vacuum Process	0.001			0.001	0.002
(3)	Flue-Cured Line	0.002			0.001	0.002
(3)	Barley/Maryland Line	0.002			0.002	0.004
(3)	Oriental Line	0.001			0.000	0.002
(3)	Reconstituted Tobacco	0.029	0.003		0.015	0.047
(3)	Blending	0.000			0.001	0.001
(3)	Casing	0.001		0.006	0.000	0.007
(3)	Cutting	0.001			0.001	0.002
(3)	Crushed Rolled Stem	0.002			0.000	0.002
(3)	Drying & Cooling	0.001			0.001	0.002
(3)	Bulking	0.006			0.003	0.010
(4)	Plug Making	0.081	0.007	0.326	0.004	0.419
(5)	Cigarette Making	0.148	0.014	0.253	0.036	0.451
(6)	Packaging	0.212	0.019	0.511	0.014	0.756
(6)	Shipping	0.004	0.000			0.004
(6)	Quality Control	0.004	0.000		0.001	0.006
	Total Manufacturing Costs	$0.505	$0.045	$2.249	$0.087	$3.989
(7)	Building Depreciation				0.015	0.015
(7)	Overhead and Transport					0.219
(7)	Advertising					1.474
(9)	Federal Excise Tax					3.145
	TOTAL COSTS					$8.841
(8)	Operating Profits					4.426
	TOTAL WHOLESALE PRICE					$13.268

Source:  Sumner, et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, 59.

Exhibit A-4 - Cigarette Taxes Per Carton of 200 Cigarettes

Province	Provincial Tobacco Tax	Federal Excise Tax	Federal Excise Duty	Total
Newfoundland	27.00	10.35	5.50	42.85
Prince Edward Island	29.90	10.35	5.50	45.75
Nova Scotia	26.04	10.35	5.50	41.89
New Brunswick	23.50	10.35	5.50	39.35
Quebec	18.10	10.35	5.50	33.95
Ontario	17.20	10.35	5.50	33.05
Manitoba	29.00	10.35	5.50	44.85
Saskatchewan	32.00	10.35	5.50	47.85
Alberta	32.00	10.35	5.50	47.85
British Columbia	32.00	10.35	5.50	47.85
Yukon	20.40	10.35	5.50	36.25
Northwest Territories	33.20	10.35	5.50	49.05
Nunavut	31.20	10.35	5.50	47.05
AVERAGE	$27.04	$10.35	$5.50	$42.89

Source: Finance Department, Provincial Governments, Finance Canada; Retail Price - by Province, available online at http://www.ncth.ca/NCTHweb.nsf  Data as of April 2003.

Exhibit A-5 - Aggregate Manufacturing Cost Structure (2002 Canadian Dollars per 200 Cigarettes)

		Cost Categories
Group		Labour	Energy	Materials	Depreciation	Total
(1)	Purchased Leaf Tobacco			1.152		1.152
(2)	Handling, Transport and Storage					0.978
(3)	Tobacco Processing					0.223
(4)	Plug Making (a)	0.081	0.007	0.326	0.004	0.419
(5)	Cigarette Making (b)	0.148	0.014	0.253	0.036	0.451
(6)	Packaging/Shipping (c)	0.220	0.020	0.511	0.015	0.766
(7)	Business Expenses					1.708
(8)	Operating Profits					4.426
(9)	Taxes (d)					42.892
WHOLESALE PRICE						$53.015

Notes:
(a) Materials cost includes filter materials, adhesives, paper wraps and flavourings.
(b) Materials cost includes paper, tipping materials, starch, adhesives and ink.
(c) Materials cost includes packets, foil, plastic wrap, tear tape, adhesives, cartons and cases.
(d) Includes Provincial Tobacco Tax, Federal Excise Tax and Federal Excise Duty.  See Exhibit A-4.

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⁹¹ Sumner, et al., 1987, Economic Sector Data for Modeling the Impact of Less Ignition-Prone Cigarettes, Technical Study Group on Cigarette and Little Cigar Fire Safety, Center for Fire Research, National Bureau of Standards, 59.

⁹² Morris, James E., 1980, « This Tobacco Business Part XIII: Manufacturing Costs of Cigarettes », Tobacco International 182 (26), pp. 47-52.

⁹³ L'indice de la parité des pouvoirs d'achat (PPA) est calculé par l'Organisation de coopération et de développement économiques (OCDE) et l'indice des prix à la consommation (IPC), par Statistique Canada.