...Destin Brass Production Company Contents Executive Summary ...................................................................................................................... 2 Problem Statement ....................................................................................................................... 2 Key Decision Criteria .................................................................................................................... 3 Alternatives Analysis ..................................................................................................................... 3 Recommendations ........................................................................................................................ 4 Action and Implementation Plan ................................................................................................... 5 Outcome Measure Specification ................................................................................................... 7 Textbook Questions ...................................................................................................................... 7 Appendix ....................................................................................................................................... 9 Exhibit 1. Net income in traditional and ABC systems. .................................................................. 12 Exhibit 2. Cost per unit based on ABC method .............................
Words: 2693 - Pages: 11
...Sec 01 12/10/11 I would recommend that Destin Brass stay in the flow control market by increasing current prices. However, I would also recommend amending the goal of having a 35% gross margin across all three products. Currently Destin Brass is selling their Flow Controllers for a few dollars under cost. After getting buy-in about lowering target gross margin for Flow Controllers, I would recommend a selling price of $120. This is less than a $25 price increase and in my marketing experience, price increases of less than $25 usually have an effect of less than 5% on consumer demand. This data is valid only for products priced around the $100 range. Destin Brass also has the advantage of being the only supplier in town so they should not see a drastic change in demand. Another reason for the modest price increase is that it may prevent competitors from jumping into the market. For example, if Destin Brass stuck with their goal of 35% gross margin across the board, they would have to sell Flow Controllers for $155. This large profit could entice other companies to shell out the money in start-up costs and start competing. Once Destin knows the true impact of the price increase, they should immediately go about finding ways to reduce the production costs of flow controllers. Before implementing this price increase, I would be up front with the customers to let them know why there is another price increase. If Destin has formed collaborative relationships with...
Words: 552 - Pages: 3
...Introduction Destin Brass Products Co. is a Florida based manufacturing company specializing in brass components that are used in fluid distribution systems within the water purification industry. They operate one manufacturing facility and focus on the machine and assembly steps of three products: valves, pumps and flow controllers. Recently, Destin has been facing increasing price competition on their line of pumps which is causing them to continually reduce prices resulting in lower margins. The inverse is happening in the market for flow controllers as there is no direct competition allowing for price increases. Although competition exists for their third product, valves, there has been no downward price pressure so the pricing and margins have remained stable. Problem Statement In trying to determine how competitors have been able to continually lower their pricing for pumps, Destin has taken a closer look at the cost accounting for their product lines, specifically how overhead costs are allocated to the products. Their current cost account system is a traditional system which allocates overhead cost on the bases of production-run labor cost. Although Destin has a narrow range of products they are now at the point where they need more specific information on actual products costs to better determine pricing and profitability. The overhead and support costs need to be split in a more granular way and traced to the specific products in order to more accurately understand...
Words: 746 - Pages: 3
...School 5-191-029 Rev. April 27, 1993 Destin Brass Products Co. ost Teaching Note Substantive Issues Raised The managers of Destin Brass Products a y or P re struggling to understand the relationship between their costs and prices for each of the three products produced and sold by Destin. One of the products, pumps, is coming under increasingly competitive price pressure. As a result, Destin has been unable to maintain its desired profit margin. At the same time, Destin has been able to raise prices on another product, flow controllers, apparently with no effect on demand and no increase in competition from other manufacturers. As a result of these situations, management is increasingly questioning whether it knows the true manufacturing costs of its products. At the time of the case, Destin was using a conventional cost accounting system in which all overhead was allocated to product based on direct labor dollars. The controller had already recommended to the company president that they might consider a more modern cost accounting system with a somewhat more-refined allocation system, using material cost and machine hours to allocate overhead related to material receiving and handling. A third possible system in which overhead would be allocated based on transactions (an activity-based costing system, or ABC system) is described in the case by the manufacturing manager in such a way that the costs of products under that system can be estimated and...
Words: 3716 - Pages: 15
...| | | | | | | | | | | | | | | | |Destin Brass Products | | | | | | | | | | | | | | | | | ...
Words: 755 - Pages: 4
...Destin Brass Products Destin Brass produces three products used for water purification systems: valves, pumps and flow controllers. They are seeing high competition in the pumps market while competitors are reducing the prices on pumps. Because they do not have any design advantages to their product, they feel they need to follow the market and lower their prices as well. A meeting was held to discuss the declining profits and a proposal to change their overhead allocation method was proposed. 1.) Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs to estimate product costs for values, pumps and flow controllers. Based on the information in the case, the cost of valves is $39, the cost of pumps is $81 and the costs of flow controllers is $147. The breakdown of the analysis is below. Total Values Pumps Flow Controllers Manufacturing Costs Material Cost per Unit 16 20 22 Units per Month 7500 12500 4000 Material Cost per Month 120000 250000 88000 Labor Costs Production runs per month 1 5 10 Setup Labor Hours per Production Run 8 8 12 Run Labor Hours per Unit 0.25 0.5 0.4 Setup Labor Hours per Month 8 40 120 Run Labor Hours per Month 1875 6250 1600 Labor Costs per Hour 16 Setup Cost per Month 128 640 1920 Run Labor Cost per Month 30000 500000 256000 Machine Usage Costs Machine Usage Hours per Unit 0.5 0.5 0.2 Machine Usage Hours per Month 10800 3750 6250 800 Machine...
Words: 853 - Pages: 4
...Destin Brass Products Co. Case study Cost Issues. Vales: Several competitors could math our quality but none had tried to gain market share by cutting price and gross margins had been maintained. Pumps: Our competitors’ sales prices are below our pump-cost calculation even when our manufactural process is better. Could not figure out how competitors making profit unless being subsidized by other products. Flow Controllers: We increased price by 12.5% with no apparent effect on demand. Peggy (controller) opinions are: 1) Material and labor cost are related to products produced. 2) Competitors marking different assumption about overhead costs. 3) Currently using traditional costing system-preparing financial reports and tax returns. 4) Introduced revised cost systems. 5) Proposed Activity based costing as initiated by Scott. Since Destin is not seeing any noticeable competition in the FC market, price could easily be raised the $3 to produce the 35% profit margin budgeted for (Exhibit 3). In the valve market Destin only has one customer. To have valve unit costs produce the 35% gross profit margin, an increase in price of $10 will have to be made (Exhibit 3). This will have to be carefully considered prior to execution. With such a drastic price increase, the one customer may go elsewhere for valves. The company could also look to expand it's customer base for valves, increasing the numbers of production runs, and help increase profit margins. If Destin were to no longer...
Words: 673 - Pages: 3
...Case Study #1 Destin Brass Products Background Destin Brass Products is a local specialized brass products manufacturer in Florida. Brass foundries are purchased from suppliers and are machined and assembled in the company’s three product line. Valves, Destin’s first product line, is having a stable share in a mature market due to the precise specifications requirement and advanced manufacturing skills. Pumps, a product line generating 55% of the revenues is recently suffered from price cutting and profit decreasing due to competitive pressure. Flow controllers, a product line with little competition and a potentially growing profitability. The company is currently using a traditional volume-based costing system with direct labor cost as the allocation base. Problems and Issues The main problem faced by Destin Brass Products is the falling profitability of pumps due to competitive pressure. The competitors kept reducing price on pumps and Destin was forced to follow regardless of the high production costs. The key issue sits in the costing system. Destin is using a plant-wide rate to allocate all overhead with a base of direct labor dollars. However, each production line consumes resources differently and the direct labor dollars, materials cost or machine hours is not a proper measurement of the consumption for all the overhead in the cost pool. For example, in Exhibit 4, machine hours is not a cost driver for engineering, packing and shipping costs, so it should not be used...
Words: 736 - Pages: 3
...Destin Brass Products Company (“Destin”) was established in 1984 when Steve Abbott had sensed an opportunity after talking with a president of a large manufacturer of water purification equipment who was dissatisfied with the quality of the brass valves available. Soon after the formation of the company, Scott and his team were able to manufacture valves that met or exceeded the needed specification enabling them to acquire a contract with the purification equipment manufacturer and enabling them to turn a profit. Destin now manufactures valves, pumps, and flow controllers, all three of which are used in water purification systems. Recently, it has become clear through their financial reports that competitors are using different strategies. Despite the fact that the competitors sell pumps at lower prices, they must still be making a profit, while Destin’s gross margin on pumps continues to decrease as they are forced to cut prices to keep up with the competition. In a meeting with Destin leadership, that was held to come up with possible suggestions to work around the issue, they realized that competitors are not taking advantage of the opportunity for profit in flow controllers. In the meeting, Destin leadership decides to look into adopting a new accounting system that would allocate the cost of each resource to the products based on direct consumption by each product. Under this new accounting system, flow controllers appear even more profitable due to the way...
Words: 314 - Pages: 2
...ACCT 7107 Minor case 1 Destin Brass Products Co. 1. Background. Destin Brass Products is a company that manufactures pumps, valves and flow controllers. Roland Guidry is the president, Peggy Alford is controller, John Scott, the manufacturing manager and Steve Abbott, the sales and marketing manager, they held significant shares of this company. Pumps are the major production in the company but now they force to a situation that in this large market, other competitors reduce their prices. The revenue and gross margin of pumps begin to fall down. 2. Problems and Issues. The problem in this company is that they still using the traditional volume-based cost accounting system. From the exhibit 3 and 4 and what Peggy said, we can find that the overhead cost is large, but some of them have no relationship with the production run or labor cost, for example, the set-up labor, materials handling and the machine costing. When the overhead cost is large, the traditional cost accounting system is inaccurate. And for this company, they manufacture different products; allocate the overhead cost by traditional cost accounting system will also cause imprecise accurate. 3. Recommendation. Because the company uses the traditional volume-based accounting costing system, they allocate too much overhead costing into their product costing. And also, manufacture several products will make the OH inaccurate. So the solution for this company is to use the Activity Based costing, this...
Words: 397 - Pages: 2
...Destin Brass Products Co. Case Analysis Required Questions Solution Click Link Below To Buy: http://hwcampus.com/shop/destin-brass-products-co-case-analysis-required-questions-solution/ Purchase and read the case study titled Destin Brass Products Co. by William J. Bruns Jr. It should cost you $3.95. There is also a supplemental spreadsheet that you should download to work from. Disregard the questions at the end of the case. You should answer the following questions: Requirement #1 – Using Activity Based Costing to determine the cost per product. a.) Use Exhibit #4 to calculate the activity rates per each activity for the material related overhead and the other overhead amounts. b.) Use the rates you calculated in part a to calculate the total overhead applied to each product. (You should use the activities in Exhibit 5. Where activity numbers have been provided use the actual activity amounts not their percentages as the case writers have rounded their percentages. For example use the number of transactions 4 + 25 + 100 = 129 transactions not 3% + 19% + 78%) c.) Don’t forget to use the Material, Set up labor, and Direct labor, costs provided for each product in Exhibit 4. Requirement #2 – Compare the cost you got for Requirement #1 to the standard cost in Exhibit #3 and the Revised Unit Cost in Exhibit #4. What is causing the different costs per product between the three different costing methods? a.) Put all three costs on one spreadsheet so you...
Words: 740 - Pages: 3
...Destin Brass Products Co. Case Analysis Required Questions Solution Click Link Below To Buy: http://hwcampus.com/shop/destin-brass-products-co-case-analysis-required-questions-solution/ Purchase and read the case study titled Destin Brass Products Co. by William J. Bruns Jr. It should cost you $3.95. There is also a supplemental spreadsheet that you should download to work from. Disregard the questions at the end of the case. You should answer the following questions: Requirement #1 – Using Activity Based Costing to determine the cost per product. a.) Use Exhibit #4 to calculate the activity rates per each activity for the material related overhead and the other overhead amounts. b.) Use the rates you calculated in part a to calculate the total overhead applied to each product. (You should use the activities in Exhibit 5. Where activity numbers have been provided use the actual activity amounts not their percentages as the case writers have rounded their percentages. For example use the number of transactions 4 + 25 + 100 = 129 transactions not 3% + 19% + 78%) c.) Don’t forget to use the Material, Set up labor, and Direct labor, costs provided for each product in Exhibit 4. Requirement #2 – Compare the cost you got for Requirement #1 to the standard cost in Exhibit #3 and the Revised Unit Cost in Exhibit #4. What is causing the different costs per product between the three different costing methods? a.) Put all three costs on one spreadsheet so you...
Words: 740 - Pages: 3
...Component & Fabrication Plant 1. The official overhead allocation rate used in the 1987 model year strategy study at the Automotive Component and Fabrication Plant (ACF) was 435% of direct labor cost. Calculate the overhead allocation rate using the 1987 model year budget. Why do you get different numbers? 2. Calculate the overhead allocation rate for each of the model years 1988 through 1990. Are the changes since 1987 in overhead allocation rates significant? Why have these changes occurred? 3. Consider two products in the same product line: Product 1 Product 2 Expected Selling Price $62 $54 Standard Material Cost 16 27 Standard Labor Cost 6 3 Calculate the expected gross margins as a percentage of selling price on each product based on the 1988 and 1990 model year budgets, assuming selling price remains constant and material/labor costs do not change from standard. 4. Are the product costs reported by the cost system appropriate for use in the strategic analysis? 5. Assume that the selling prices, volumes, and material costs for the 1991 model year will not change for fuel tanks and doors produced by the ACF of Bridgeton Industries. Assume also that if manifolds are produced, their selling prices, volume, and material costs...
Words: 1915 - Pages: 8
...Case #15 Destin Brass Products Co Harvard Business School Case #9-190-089 (Rev. April 24, 1997) Questions 1. Explain how costs are estimated in the three cost systems delineated in the case: (a) The traditional cost system, (b) the modified cost system, and (c) the activity based costing (ABC) system. How do you determine which cost system is better suited for a given company? The traditional cost accounting system in Destin is built on measurements of direct and direct costs and on assumptions about its production and sales activity. Each unit of product is charged for material cost and labor cost; material cost is based on the prices it pays for components , and labor cost is based on the standard times for run labor times the labor pay rate of $16 per hour. Overhead cost is assigned to products in two-stage process. First, the overhead costs are assigned to production- in Destin case it has only one production department so they are sure all overhead costs are assigned correctly at the first stage. Then, the total overhead costs assigned to production are allocated on the basis of production-run labor cost. Every $1.00 of run labor cost causes $4.39 of overhead to be allocated to the product to which the labor was applied. The modified cost system would be to forego the overhead cost allocation altogether. Overhead costs could be charged each month as period expenses. Product profitability would then be measured at the contribution margin level, or price less all...
Words: 879 - Pages: 4
...Destin Brass Products Co. manufactures three items: valves, pumps and flow controllers (FC's). All three items are used in water purification systems. Destin faces stiff competition in the pump market with no design advantage that would make their pumps more desirable. A meeting was held due to declining profits caused by a lower price Destin was able to charge for pumps and having budgeted pumps sales to account for 55% of company revenues. A proposal was put forth to modify how the company allocates it's overhead costs to the three items it produces. The company currently uses a standard costing method based on direct labor dollars. This method finds the standard cost per units of valves to be $37.56, pumps $63.12, and FC's $56.50. If the company were to switch to Activity-Based Costing (ABC) the cost per units for valves would be $47.17, pumps $51.64, and FC's $74.22 (Exhibit 1). This is an increase of 20.37% for valves, a decrease of 22.23% for pumps, and an increase of 35.38% for FC's. The company has also calculated unit costs separating the overhead rates for receiving and shipping of materials from other overhead costs. This revised unit cost results in an increase of 23.35% for valves from standard, a decrease of 7.07% for pumps from standard and a decrease in FC's of 17.81% from standard. The revised unit costs are still not close to the costs using the ABC method. The differences are a 3.89% decrease in valves, a 14.15% decrease in pumps and a increase of 35.38%...
Words: 709 - Pages: 3
