Dansk Minox Case

A/S Dansk Minox Thiscase is set in Denmarkin J967 whenthe ..boom" in consumerfood productswasjust beginning-more working mothers,more disposableincome,more choicesin convenience food products. Should the company,a food products manufacturer,introduce "complete meal" products to enhancetheproduct line?

A/S Dansk Minox in Copenhagen, specialized in branded vacuum-packed meat and other food products. For many years it had sold vacuum-packed sliced pork in gravy, a very popular dish in Denmark. In 1965 the product represented about 15% of the finn's total sales in the country in a product line which comprised 30 products. The Danish housewife very often serves this dish together with a red cabbage salad. Because this salad is rather time-consuming to prepare at home, certain competitors of A/S Dansk Minox had recently introduced red cabbage salad in vacuumpacked, canned, or frozen form. However, A/S Dansk Minox estimated that the major part of the red cabbage sold was still prepared at home. Although sales of ready-made red cabbage salad were expanding rapidly, it was confirmed by consumer research that there was still a great untapped potential for such a product. At the end pf 1965 A/S Dansk Minox had not marketed vacuum-packed red cabbage salad. But in view of existing market potential, and since it was so often eaten together with sliced pork, the company management considered introducing vacuum-packed red cabbage salad in 1966. NS Dansk Minox was also considering introducing a specialty line of complete meals, which were to be sold in an attractive carton containing vacuum-sealed bags with the different ingredients for the meal. The management decided that the first product in this specialty line was to be "sliced pork in gravy with red cabbage". The product was to be packed in a carton containing the standard vacuumsealed bag of sliced pork plus another bag with the red cabbage. Cost allocation problems arose in this connection, leading to long discussions between the marketing and finance departments of the Danish company. The standard product, "sliced pork in gravy", was sold in a 450-gram bag at a consumer price of D.Cr. 4.85. This was the "ideal" quantity for an average family, giving between 3 and 4 servings. Therefore, when considering the "complete meal" product, the marketing department did not wish to change the quantity of sliced pork in gravy. Extensive testing showed that the average family consumed between 500 and 600 grams of red cabbage salad with 450 grams of sliced pork in gravy. It was therefore decided to sell the "complete meal" product in a I-kilogram pack, containing the standard 450-gram bag of sliced pork in gravy plus another vacuum sealed bag with 550 grams of red cabbage salad. The marketing department received a preliminary selling price recommendation from the finance department, based on the assumption that the new product should produce approximately the same profit per kilogram as the standard pork in gravy [i.e., D.Cr. 0.30 per kilogram per Exhibit I].

here, with minor editing, with permission from the author.

I 106

I

I The difference in consumer price between the of the new "complete meal" product. The estimated sales two packs as proposed by the finance department meant of the new product were included in the budgeted sales that the consumer would have to pay D.Cr. 3.35 (8.20 -Quantit): for 1966. 4.85) for the red cabbage salad, since the sliced pork in .The finance department claimed that any gravy content of the two packs was the same. The departure downwards from the rate of D.Cr. 1.20 per marketing department protested that this price difference kilogram for production fixed expenseswould result in an was prohibitive, since the ingredients for making the red under coverage of fixed expenses. The marketing cabbage salad at home could be bought for approximately department replied that a strict application of this rule D.Cr. 1.10 and the labor costs at home (if counted at all) would lead to unreasonable consequences in this case, would not amount to more than approximately 0.70. The where a relatively cheap component (red cabbage) is marketing department argued that A/S Dansk Minox added to an expensive component (sliced pork in gravy), could not expect the consumer to pay more than D.Cr. and where the cheap component more than doubles the 2.00, at the most, for the red cabbage salad and added weight of the new pack and thus also doubles the fixed convenience, thus showing a consumer price for the new overhead charged to the product. The finance department pack of 4.85 + 2.00 or 6.85. The marketing department stated that it would be impractical to use different contended, furthennore, that the finance department's overhead rates per kilogram for different products. It was selling price calculation showed that the raw material and supported in this view by the managing director who said labor costs amounted to only 0.75 for the red cabbage that the product should not be introduced if a nonna! salad and that it was unreasonable that the addition of the selling price calculation did not show a reasonable other cost elements should result in a total consumer price operating profit. difference of 3.35. The marketing department then The marketing department responded that selling proposed its own price calculation, based on the the new product at D.Cr. 8.20 per pack was out of the assumption that the consumer price for the "complete question; therefore, only two alternatives remained: meal" would be D.Cr. 6.85 as indicated above (see Exhibit 2). (a) Abandon the whole project There was no disagreement between the marketing and finance departments with regard to the raw (b) Establish a consumer price of D.Cr. 6.85 and a material, labor, packaging material, transport and storage, price to the retailer of D.Cr. 4.78. The 8% and sundry variable costs. The item "Other productmargins and discounts to wholesalers and the 4% related fixed expenses" covered mainly advertising. general overhead would then amount to 0.38 + Consequently, the marketing department could not argue 0.19 instead of 0.46 + 0.23, a reduction of 0.12. with the finance department about this item, either, since The production fixed expense would need to be it was under the control of the marketing department. reduced from 1.20 to 0.54, the same amount as The two items "Margins and discounts" and "General for one standard pack of sliced pork in gravy. overheads" are, as a standard rule in the company, calculated as fixed percentages of the price to the retailer The managing director decided, in spite of the (8% and 4%, respectively). Although this procedure marketing department's arguments, that the new product might be Opento question, the marketing department was should not be introduced without full coverage of fixed satisfied that the costs allocated to this product would expenses. It was introduced at a consumer price of D.Cr. decrease automatically if a lower selling price could be 8.20, and the sales budget was set at 85 tons. This was agree upon. about forty-five percent of the budgeted sales of the The main discussion, therefore, centered upon standard pack of sliced pork in gravy, which reflected the the item "Production fixed expenses." After internal assumption that the upward sales trend of recent years agreement on the sales budget every year, the total would continue. In other words, the company did not production fixed expenses were divided by the total sales expect that the new "complete meal" product would steal quantity, expressed in kilograms. This computation had sales from the standard pack. Some customers would resulted in a rate of D.Cr. 1.20 per kilogram for the year certainly switch over from the old product to the new, but 1966. This rate was then applied to all products from the these losses would be offset by the added sales resulting company's factory. There was no need to buy any new from greater consumer awareness of A/S Dansk Minox equipment for making the red cabbage salad and there products due to the planned advertising campaign for the was spare capacity available for the estimated production "complete meal" item.

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In the months that followed, a number of complaints about the high price of the new product were received from retailers and consumers, and sales for 1966 amounted to only 30 tons in contrast to the budgeted 85 tons. Sales of the standard pack, on the other hand, exceeded the budgeted volume by a small percentage.

QUESTIONS: 1) Once the decision was made to introduce the., "complete meal" product and to advertise it according to the plan, what was the impact on profit in 1966 (before taxes) of selling 30 tons at a retail price of Cr. 8.20?

Dl:

ADDITIONAL

2)

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Assume

that

INFORMATION

I ton

= 1000

Kg.

(a"

metric

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se,

is ) ~; ~ed ent ent vas aid I ~~e ing the

d a 8% 4% 8 + .12. »be t as

"complete

meal"

product

and

to

advertise

it

according to plan, what would have been the impact on profit in 1966 (before taxes) if 85 tons had been sold at a retail price of Cr. 6.85?

The budgeted sales volume for standard pack pork with gravy for 1966 was 189 tons. Budgeted production fixed expenses for the company for 1966 was Cr. 1.51 million.

Once the decision had been made to introduce

the

3)

Combining questions I and 2, which retail price would produce more incremental profit for the firm in 1966, and how much more?

Budgeted direct labor expense for the company for 1966 was Cr. 700,000.

4)

Assume the cost item "other product related fixed expenses" is advertising and that the annual budget for the item must be committed at the beginning of the year for any product that will be sold that year.

What sales volume is required at a retail price of Cr. 6.85 to give the same profit impact in 1966 (before taxes) as selling 30 tons at a retail price ofCr.8.20?

5)

What is the total unit cost and per unit profit for 1 Kg of "complete meal" at a retail selling price of Cr. 6.85 and with an allocation of Cr. 1.20 for production fixed expenses?

6)

How much production fixed expense should be allocated to I Kg of "complete meal"? Give a specific number and your logic to support the number.

7)

What is your recommendation to management regarding the new "complete meal" product for

The cost item "transportation, storage" represents an allocated share of the expense for operating a fleet of company owned delivery trucks and a company owned finished goods warehouse. The company believes these expensesshould be considered volume dependentbecause the alternative to company ownership would be use of public freight companies and a public warehouse, both of which charge a price per kilo of product handled.

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109 EXHIBIT

2

A/S Dansk Minox Marketing Department Proposal

Consumer Price Turnover Tax (12.5% of consumer price before tax)

Std. Pack

Difference

6.85

4.85

2.00

.1.Q.,5.:1

Consumer Price Before Tax

6.09

Retailer's Margin (27.5% of price to retailer)

Ul.,21.J..8.

n 4.31

1.78

4.78

3.38

1.40

1.67

1.67

Labor: Pork

.25

.25

Material: Cabbage

.50

.50

Labor: Cabbage

.25

.25

Packaging

.26

.11

.15

Transportation, Storage

.20

.09

.11

Margins and Discounts to Wholesalers (8%)

.38

.27

.11

Sundry Variable Costs

JS1...0..4

Price to Retailer Material: Pork

Total Variable Costs

2.43

Production Fixed Expenses

.54

.54

Other Product Related Fixed Expenses

.30

.14

General, Selling and Administrative Expenses and Overhead (4% of Price to Retailer)

J.9...lA

PROFIT

.

Jl6.

3.61

TOTAL COST 4.64

---

New Pack

1.18

.16

1)5..

3.25

1.39

.14

.13

.01

..

'108

---

EXHIBIT

1

A/S Dansk Minox Finance Department Proposal New Pack

Std. Pack

Difference

8.20

4.85

3.35

.2.l

~

J.1

Consumer Price Before Tax

7.29

4.31

Retailer's Margin (27.5% of price to retailer)

1.51-.21

Consumer Price Turnover Tax (12.5% of consumer price before tax)

Price to Retailer

2.98

M

5.72

3.38

1.67

1.67

Labor: Pork

.25

.25

Material: Cabbage

.50

.50

Labor: Cabbage

.25

.25

Packaging

.26

.11

.15

Transportation, Storage

.20

.09

.11

Margins and Discounts to Wholesalers (8%)

.46

.27

.19

Sundry Variable Costs

..lQ

M

..Q..6

3.69

2.43

1.26

1.20

.54

.66

.30

.14

.16

;};l

~

m

3.25

2.17

.30

.13

Material: Pork

2.34 ~~:,,~

;

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Total Variable Costs Production Fixed Expenses

(D.Cr.l.20perkilogram) Other Product Related Fixed Expenses General, Selling and Administrative Expensesand Overhead (4% of

Priceto Retailer) TOTAL COST 5.42 PROFIT

.17