Dansk Harvard Case

A/S DANSK MINOX, COPENHAGEN

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 servesthis 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 saladexpanded 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 DanskMinox 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 standardvacuum-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, givingbetween 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 perkilogram (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 makingthe 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...