A/S DANSK MINOX, COPENHAGEN
Click Link Below To Buy:
Contact Us:
Hwcoursehelp@gmail.com
A/S Dansk Minox in Copenhagen, specializing in
branded vacuum-packed meat and other food products, had for many years sold
vacuum-packed sliced pork in gravy, a very popular dish in Denmark. In 1995 the product represented about 15% of
the firm's total sales in the country in a product range which comprises 30
products. The Danish house-wife very often serves this dish together with a red
cabbage salad. This salad is rather time-consuming to prepare at home and
certain competitors of A/S Dansk Minox had recently introduced red cabbage
salad in either vacuum-packed, canned, or frozen form. However, A/S Dansk Minox
estimated that the major part of the red cabbage sold was still prepared at
home, and although sales of ready-made red cabbage salad expanded rapidly, it
was felt, and consumer research confirmed this, that there was still a great
untapped potential for such a product.
At the end of 1995 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, company management also
considered producing red cabbage salad. A/S Dansk Minox had during the last
year considered 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" and the product was to be packed in a carton containing the
standard vacuum-sealed bag with 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 1-kilogram
pack, containing the standard 450-gram bag with sliced pork in gravy plus
another vacuum sealed bag with 550 grams of red cabbage salad.
The marketing department received a preliminary
selling price calculation from the finance department, based on the assumption
that the new product should produce approximately the same profit per kilogram
as the standard sliced pork in gravy, i.e., D.Cr. 0.30 per kilogram (see
Exhibit 1).
The difference in consumer price
between the two packs as proposed by the finance department meant that the consumer would have to pay D-Cr.
3.35 (8.20 - 4.85) for the red cabbage salad, since the sliced pork in gravy
content of the two packs was the same. The marketing department protested that
this price difference was prohibitive, since the ingredients for making the red
cabbage salad at home could be bought for approximately D.Cr. 1. 10 and the
labor costs at home (if counted at all) would not amount to more than
approximately 0.70. The marketing department argued that A/S Dansk Minox could
not expect the consumer to pay more than D.Cr. 2.00 at the most for the red
cabbage salad and added convenience, thus leaving a consumer price for the new
pack of 4.85 + 2.00 or 6.85. The marketing department contended, furthermore, that the selling price
calculation showed that the raw material and labor costs amounted to only 0.75
for the red cabbage salad and that it was unreasonable that the addition of the
other cost elements should result in a total consumer price difference of 3.35.
The marketing
department
then proposed its own price calculation, based on the assumption that the
consumer price for the "complete meal" would be D.Cr. 6.85 as
indicated above (see Exhibit 2).
There was no disagreement between
the marketing and finance departments with regard to the raw material, labor,
packaging material, transport and storage, and sundry variable costs. The item
"Other product-related fixed expenses" covered mainly advertising;
consequently, the marketing department could not argue with the finance
department about this item either, since it was under the control of the
marketing department. The two items "Margins and discounts" and
"General overheads” are, as a standard rule in the company, calculated as
fixed percentages of the price to the retailer (8% and 4%, respectively).
Although this procedure might be open to question, the marketing department
knew these calculated costs would decrease automatically if a lower selling
price could be agreed upon.
The main discussion, therefore, centered upon the
item "Production fixed expenses." After internal agreement on the
sales budget every year, the total production fixed expenses were divided by
the total sales quantity, expressed in kilograms. This computation resulted in
a rate of D.Cr. 1.20 per kilogram for the year under consideration. This rate
was then applied to all products from the company's factory. There was no need
to buy any new equipment for making the red cabbage salad and there was spare
capacity available for the estimated production of the new "complete
meal" product. The estimated sales of the new product were included in the
budgeted sales quantity.
The finance department claimed that any departure
downwards from the rate of D.Cr. 1.20 per kilogram for production fixed
expenses would result in an undercoverage of fixed expenses. The marketing
department replied that a strict application of this rule would lead to
unreasonable consequences in this case, where a relatively cheap component (red
cabbage) is added to an expensive component (sliced pork in gravy), and where
the cheap component more than doubles the weight of the new pack and thus also
doubles the fixed burden charged to the product. The finance department stated
that it would be impractical to use different burden rates per kilogram for
different products. It was supported in this view by the managing director, who
said that the product should not be introduced if a normal selling price
calculation did not show an operating profit.
The marketing department responded that selling the
new product at D.Cr. 8.20 per pack was out of the question; therefore, only two
alternatives remained:
(a) Abandon the whole project
(b) Establish a consumer price
of D.Cr. 6.85 and a price to the retailer of D.Cr. 4.78. The 8% margins and
discounts to wholesalers and the 4% general overhead would then amount to 0.38
+ 0.19 instead of 0.46 + 0.23, a reduction of 0.12. The production fixed
expense would need to be reduced from 1.20 to 0.54, the same amount as for one
standard pack of sliced pork in gravy.
The managing director decided in spite of the
marketing department’s arguments that the new product should not be introduced
without full coverage of fixed expenses. It was introduced at a consumer price
of D.Cr. 8.20, and the sales budget was set at 85 tons. This was about
forty-five percent of the budgeted sales of the standard pack of sliced pork in
gravy, which reflected the assumption that the upward sales trend of recent
years would continue. In other words, the company did not expect that the new
“complete meal” product would steal sales from the standard pack. Some
customers would certainly switch over from the old product to the new, but
these losses would be offset by the added sales resulting from greater consumer
awareness of Minox products due to the planned advertising campaigns for the
“complete meal” item.
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 the first year amounted to only 30 tons in contrast to
the budgeted 85 tons. Sales of the standard pack, on the other hand, exceeded
the budgeted amount by a small percentage.
ADDITIONAL INFORMATION
Assume
that 1 ton = 1000 Kg.
The
budgeted sales volume for standard pack pork with gravy for 1996 was 189 tons.
Budgeted
production fixed expenses for the company for 1996 was Cr. 1.51 million.
Budgeted
direct labor expense for the company for 1996 was Cr. 700,000.
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.
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 expenses
should be considered volume dependent because 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.
A/S DANSK
MINOX
EXHIBIT 1
FINANCE
DEPARTMENT PROPOSAL
NEW PACK STD.PACK DIFF.
Consumer
Price 8.20 4.85 3.35
Turnover Tax (12.5% of consumer
price before tax) .91 .54 .37
Consumer Price Before Tax 7.29 4.31 2.98
Retailer's Margin
(27.5% of price to retailer) 1.57 .93 .64
Price to Retailer 5.72 3.38 2.34
COSTS:
Material: Pork 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 .10 .04 .06
Total Variable Costs 3.69 2.43 1.26
Production Fixed Expenses
(D.Cr. 1.20 per kilogram) 1.20 .54 .66
Other product related Fixed Expenses
.30 .14 .16
General, selling and admin. expenses
and overhead (4% of price to
retailer) .23 .14 .09
TOTAL COST 5.42 3.25 2.17
PROFIT .30 .13 .17
A/S DANSK
MINOX
EXHIBIT 2
MARKETING
DEPARTMENT PROPOSAL
NEW PACK STD.PACK DIFF.
Consumer
Price 6.85 4.85 2.00
Turnover Tax (12.5% of consumer
price before tax) .76 .54 .22
Consumer Price Before Tax 6.09 4.31 1.78
Retailer's Margin
(27.5% of price to retailer) 1.31 .93 .38
Price to Retailer 4.78 3.38 1.40
COSTS:
Material: Pork 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 .10 .04 .06
Total Variable Costs 3.61 2.43 1.18
Production Fixed Expenses
(D.Cr. 1.20 per kilogram) .54 .54
Other product related Fixed Expenses
.30 .14 .16
General, selling and admin. expenses
and overhead (4% of price to
retailer) .19 .14 .05
TOTAL COST 4.64 3.25 1.39
PROFIT .14 .13 .01
QUESTIONS
QUESTION
1. Given the decision to introduce the "complete meal" product and
advertise it according to the plan, how much better
or worse off was the firm
by producing and selling 30 tons at a retail price
of Cr. 8.20?
QUESTION
2. Given the decision to introduce the "complete meal" product and
advertise it according to the plan, how much better
or worse off would the firm
have been if 85 tons had been produced and sold at a
retail price of Cr. 6.85?
QUESTION
3. Combining questions 1 and 2, which
retail price produces more
incremental profit for the firm, and
how much more?
QUESTION
4. What sales volume is required at a
retail price of Cr. 6.85 to give the
same incremental profit as selling
30 tons at a retail price of Cr. 8.20?
QUESTION
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?
QUESTION
6. How much production fixed expenses
should be allocated to 1 kg of
the "complete meal.” Give a
specific number and your logic to support the
number.
QUESTION
7. What is your recommendation to
management regarding the new
“complete meal" product?
No comments:
Post a Comment