Problem: A/S Dansk Minox is a company based in Copenhagen, which specializes in branded vacuum-packed meat and other food products. Through consumer survey, the company found that there was a large untapped market for a ‘Complete meal’ product which included sliced pork along with a vacuum-sealed bag of red cabbage salad. After long discussions among the marketing and finance departments, the complete meal pack was introduced at a price of $ 8.20 per pack of 1 kg. It sold only 30 tons as against the budgeted sales of 85 tons. The problem facing the company is that whether it has to stop further production of the ‘complete meal’ product or establish a new consumer price of $ 6.85 per pack, in order to boost sales. Considerations and Analysis:
In order to decide the course of action we may look at the following facts and considerations.
Consumer Price 8.20 6.85
Retailer Price 5.72 4.78
Variable Cost 3.49 3.41
Volume Sales (in kgs) 30000 85000
Advertising Costs 0.3 0.3
Impact on Profit 41,400 90,950
As we can see, impact on profit is higher when 85000 kgs of complete meal is sold at $6.85/kg, rather than selling 30000 kgs at $ 8.20/kg. Now, another point to note is if production expenses are to be revised to $ 1.20/kg, then on a full cost basis, the complete meal would cost. Total unit cost (new) = Total unit cost (old) – Production expenses (old) + Production expenses (revised) Total unit cost (new) = 4.64 – 0.54 + 1.20 = $ 5.30
And Profit per unit would be = Retailer price – Total unit cost (new) = 4.78 – 5.30 = (-0.52) (i.e) there would be a loss of $ 0.52/kg, on a full cost basis, when the ‘complete meal is sold at $ 6.85. Conclusion and Recommendations:
The point to be focused here is that though the new product might sell 85 tons at a revised price of $ 6.85 per pack, it will incur losses on a full cost basis. Also it is not feasible to lower the production costs anymore because, the resources of A/S Dansk Minox which were specialized for meat processing were now processing Vegetables. This is not their core competency and hence they would incur more costs in performing activities that they do not specialize in. Furthermore, the need for a single package containing sliced pork and red cabbage salad is itself questionable because the same packs are also individually available and these individual packs are of better quality because slice pork is Dansk Minox’s speciality and red cabbage salad is its competitior’s specialty.
Hence, it is recommended that Dansk Minox stop further production of ‘complete meal (because red salad is not its core competency) and concentrate on selling its ‘standard packs, which are in fact having a significant boost in their sales or the management can look to collaborate with the best ‘red cabbage salad making company and together give the customers the best quality of ‘complete meal at the best price. The final decision would however be dependent upon managerial discretion and organizational guidelines/objectives.