This study considered the production economics of coffee in Pakuwa village development committee of Parbat district, Nepal. Household Survey was done in June 2014. Data collection was done using semi-structured pre-tested questionnaire administered on 40 coffee producers selected randomly. Gross margin analysis, profitability index and the benefit-cost ratio was used to analyze the production economics of coffee in the study area. The results revealed coffee cultivation as a profitable enterprise in the study area. This is reflected by the gross margin of NRs. 90205.43 per hectare, benefit-cost ratio of 3.84 and profitability index of 1.23. Coffee sector alone contributed 16.26 percent of total household income showing positive sign for commercialization. The number of productive plants and cost on sapling were the most significant factor affecting coffee production. While keeping other explanatory variables constant, production function analysis resulted one percent change in number of productive plants and cost of sapling would increase the yield of coffee by 0.894 and 0.151 percent respectively. Further, increasing return to scale was observed in coffee production with value 1.26. Farmers explained more income from coffee and easy to sell as the major reasons of its cultivation. Lack of irrigation and lack of detailed knowledge about improved coffee production technology were ranked as production constraints whereas; low price and lack of processing facility stood as marketing constraints of coffee in the study area. Study resulted positive economic significance of coffee and this shows immense need of Government, NGOs, traders, and other line agencies to lay efforts on production and marketing management such that its quality production and household income can be raised.
•Coffee cultivation is suitable enterprise for income generation as it contributes more than 15% of household income.
•High gross margin, return to scale, benefit-cost ratio and more than one profitability index shows higher potentiality of coffee enterprise in Parbat, Nepal.
•Lack of irrigation was the most hindering factor on coffee production.
•Coffee sapling and numbers of productive plants were most significant factors in coffee production.
•Price fixation and stabilization along with establishment of well-organized market is urgent.