should take into account in determining an appropriate selling price p

Question 1

Sales commission

Answer 1

A price comparison should be undertaken between the 750ml and 50ml bottles. Equivalent pricing
would suggest a minimum price per 50ml bottle of R13,27. However, one would expect a premium
for a smaller bottle

Question 2

DMG might for the first year offer lower prices simply to attract more business (i.e. a price
penetration strategy).

Answer 2

The current gross profit margin is between 47,5% and 52,5%, providing a useful benchmark

Question 3

As DMG product is low alcohol they are differentiating themselves and thus don’t need to
differentiate by a lower price. DMG could probably adopt a premium pricing strategy and extract
value from customers willing to pay a premium for perceived quality

Answer 3

DMG should adopt a target costing approach, i.e perform market research, choose a pricing
strategy and determine if they can produce at the target or less

Question 3

Could the miniature bottles be seen as a marketing tool, and therefore DMG could earn lower
margins on this product?

Answer 3

Consider the opportunity costs that may arise, for example any other projects DMG that the capital
required could have been invested in, or the opportunity cost from forgoing savings on existing
costs that might have been achieved in the long-term if the miniature bottles were not introduced

Question 4

Consider the long-term sustainability of the project (otherwise the ten-year write-off period used to
determine the minimum/breakeven price might be inappropriate).

Answer 4

DMG should undertake proper market analysis to determine the market for the product, what
prices competitors are charging, to determine whether price elasticity exists, and if they would be
a price setter or taker? As the Gin is low alcohol they might be a price setter

Question 5

DMG should consider whether it would be able to enter into long-term contracts with e.g. hotels,
and if a lower price could be offered accordingly

Answer 5

Should any financing costs incurred as a result of the upfront costs be incorporated into the
calculations? Alt. An NPV calculation should be performed since this is a long-term pricing decision

Question 6

calculations? Alt. An NPV calculation should be performed since this is a long-term pricing decision

Consider using a higher packaging cost in the calculations – it seems the current supplier is
unethical, and DMG might, as a result, choose not to order from PackFast despite the significant
discount offered.