Case Study - Destin Brass Products Co
Case Study - 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.
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Case Study – Destin Brass Products Co.
CONCEPTS USED
1. Absorption:
2. Absorption costing:
3. Allocation:
4. Appropriation
The process by which shared overheads are divided between related cost
centres on an equitable basis.
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.
8. Unit cost
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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.
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Case Study – Destin Brass Products Co.
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).
Question 2
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?
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Case Study – Destin Brass Products Co.
Question 3
What are the strategic implications of your analysis? What actions would you
recommend to the managers at Destin Brass Products Co?
Solution
o With ABC method the costs haven’t changed much. The profit margin
is still 35% so no need to reduce the prices.
o Using ABC method, pump profit margin is 40% which is higher than
22% as calculated by the old method.
Question 4
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Case Study – Destin Brass Products Co.
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
Targeted Profit
Margin 35 35 35
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.