Destin Brass Products Co.

INTRODUCTION

Destin Brass Products Co., was facing competition in brass pumps market due to
low prices set by competitors. The company started in 1984 used to manufacture
only valves initially but started brass pumps and flow controllers because they
required the same manufacturing skills.

Valves represented 24% of the total revenue of the company and had a gross
margin of 35%. Destin was manufacturing 7500 units per month

Pumps (55% of the revenues) also required the same setup. The targeted margin
was also 35%. But recently the competitors the competitors have started reducing
prices which has forced Destin Brass Products Co. to reduce their price also. This
has resulted in reduced gross margin of 22% which is also expected to go down in
the future. The production for pumps was 12500 units per month.

Flow controllers contributed to rest 21% of the revenues. Destined manufactured

4000 units in the previous month. In this segment they did not face any
competition and had recently increased their prices by 122% with no apparent
effect on demand.

The competitors may be using a different method of accounting whereas Destin is

using the standard method of accounting. This might have resulted in the lower
cost of pumps for the competitors.
 Case Study – Destin Brass Products Co.

CONCEPTS USED

Following economics concepts have been used in the case

1. Absorption:

The process by which overheads are finally included in the cost of

production of product.

2. Absorption costing:

The process of costing in which overheads are absorbed in product

cost using some suitable method.

3. Allocation:

The process of charging overheads that are wholly associated with a

particular cost centre to that centre.

4. Appropriation
The process by which shared overheads are divided between related cost
centres on an equitable basis.

5. Activity based costing:

The method of costing in which every cost is traced by appropriate cost

driver which is based on the level of activity.

6. Direct cost
Cost related to particular cost object and that can be traced to it.

7. Indirect cost
Cost related to particular cost object but cannot be traced to it.

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 Case Study – Destin Brass Products Co.

8. Unit cost
Cost associated with one unit of production.

PROBLEMS FACED BY MANAGERS

 Competitors in the pumps market were continuously reducing their

prices. In order to compete in the market destin had to reduce their
prices. This has resulted in shrinking of the gross margin which has
come down from 35% to 22% in the recent. But as the competition is
high, further price cut is again expected. So should destin reduce its
price of not?

 Competitors are using the new accounting method whereas Destin

Brass Products Co. is still using the older one. This might be there
reason that the cost of pumps are higher than the competitors.
Should destin adopt the new accounting method or not?

Range of possible solutions

Various possible solutions for managers are:

1. Continuing with existing costing method

In this method the overhead costs are allotted on the basis of direct labour
charges.

2. Revised standard unit costs

As given in Exhibit 4, material overhead are allotted on the basis of material

used.

3. Activity based costing(ABC) method

As given in exhibit 5, costs can be allotted on the basis of the activities

performed.

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 Case Study – Destin Brass Products Co.

Selection of a solution

The best solution would be to choose activity based costing because this seems to
be the method which competitors are also choosing. Also this method gives an
explanation to reduce the price of the pumps.

QUESTIONS

Question1

Use the Overhead Cost Activity Analysis and other data on manufacturing costs to
estimate product costs for valves, pumps, and flow controllers (Activity Based
Costing).

all costs in $ valves pumps flow controllers Basis

material cost 16 20 22 material
set-up labour 0.02 0.05 0.48 labour hour
direct labour 4 8 6.4 labour hour
receiving 0.08 0.31 3.88 activty based
handling 0.83 3.10 38.76 activty based
packing and
shipping 0.27 1.12 11.00 activty based
engineering 2.67 2.40 12.50 subjective
maintenance 1.40 1.39 0.53 activty based
machine
depreciation 12.50 12.50 5.00 machine hour

ABC standard cost 37.76 48.87 100.54

Question 2

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 Case Study – Destin Brass Products Co.

Compare the estimated costs you calculate to existing standard unit costs and the
revised unit costs. What causes the different product costing methods to produce
such different results?

All costs in $ Valves Pumps FC

Standard Unit Cost 37.56 63.12 56.50

Revised Unit Cost 49.00 58.95 47.96

ABC Unit Cost 37.76 48.87 100.54

Question 3

What are the strategic implications of your analysis? What actions would you
recommend to the managers at Destin Brass Products Co?

Solution

 No change necessary for valves

o With ABC method the costs haven’t changed much. The profit margin
is still 35% so no need to reduce the prices.

 Could lower prices for pumps

o Using ABC method, pump profit margin is 40% which is higher than
22% as calculated by the old method.

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 Case Study – Destin Brass Products Co.

o The prices can be lowered in order to compete in the market and

profit margin of 35% can be maintained

 Increase price for Flow Controller

o Raise price since they are suffering loss of 4% using ABC method.

o Targeted price should be $135.73.

o Destin can raise prices as there is no competitor

 Implement ABC Method

o Using ABC, pump profit margin is good

o Most of the competitors seem to be using it

Question 4

How much higher or lower would the net income reported under the activity-
transaction-based system be than the net income that will be reported under the
present, more traditional system? Why?

flow Total
valves pumps controllers Income($)
ABC standard cost 37.76 48.87 100.54

unit price 57.78 81.26 97.07

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 Case Study – Destin Brass Products Co.

profit margin(%) 34.64 39.86 -3.58

Targeted Profit
Margin 35 35 35

net income as per

ABC 150128.3 404839.3 -13882.64 541085

earlier net income 151650 226750 162280 540680

There is no major difference in the net income using standard cost and ABC
method cost. But there is substantial difference in the cost of individual product.