...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 .............................
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...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...
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...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...
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...EXHIBIT 1 | | | | | | Total | Valves | Pumps | Flow Controllers | Manufacturing Costs | | | | | Material Cost per Unit | | $ 16 | $ 20 | $ 22 | Units/Month | | 7,500 | 12,500 | 4,000 | Material Cost per Month | | 120,000 | 250,000 | 88,000 | | | | | | Labor Unit Cost | | | | | Production Runs per Month | | 1 | 5 | 10 | Set-up Labor Hrs/Prod. Runs | | 8 | 8 | 12 | Run Labor Hrs/Unit | | 0.25 | 0.5 | 0.4 | | | | | | Set-up Labor Hrs per Month* | | 8 | 40 | 120 | Run Labor Hrs per Month | | 1,875 | 6,250 | 1,600 | Labor Cost/ Hr | $ 16 | | | | Set-up Cose per Month | | 128 | 640 | 1920 | Run Labor Cost per Month | | 30,000 | 100,000 | 25,600 | | | | | | Machine Usage Costs | | | | | Machine Usage Hrs per unit | | 0.5 | 0.5 | 0.2 | Machine Usage Hrs per Hrs per month* | 10800 Total Hrs | 3,750.00 | 6,250.00 | 800.00 | Machine Usage cost per Month* | $25 | 93,750 | 156,250 | 20,000 | | | | | | Manufacturing Overhead Costs* | | | | | Receiving Costs | 20,000.00 | 600 | 3,800 | 15,600 | Handling Costs | 200,000.00 | 6,000 | 38,000 | 156,000 | Packing and Shipping Costs* | 60,000.00 | 1,800 | 13,800 | 43,800 | Engineering Costs | 100,000.00 | 20,000 | 30,000 | 50,000 | Maintenance Costs | 30,000.00 | 10,500 | 17,400 | 2,100 | Total Overhead Costs | 410,000 | 38,900 | 103,000 | 267,500...
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...1. Cost Breakdown Valves Pumps Flow Controllers Production 7500 12500 4000 Runs 1 5 10 Shipments 1 7 22 Material Costs Per Valve 16 20 22 Total Material Costs 120000 250000 88000 Labor Costs Setup/Run 8 8 12 Setup Costs @ $16/hr 128 640 1920 Runtime/Unit 0.25 0.5 0.4 Runtime Costs @ $16/hr 30000 100000 25600 Machine Costs Usage/Unit 0.5 0.5 0.2 Usage/Month 3750 6250 800 Usage Cost @ 25$/hr 93750 156250 20000 Overhead Receiving @20000 600 3800 15600 (Values are estimates from the case, not entirely accurate) Materials Handling @200000 6000 38000 156000 Engineering @100000 20000 30000 50000 Packing and Shipping @60000 1800 13800 43800 Maintenance @30000 10500 17400 2100 Total Overhead 38900 103000 267500 Total Cost 282778 609890 403020 Cost/Unit 37.70373 48.7912 100.755 2. The difference from the standard method and the method above is that allocation of overhead is distributed as a result of percentage of direct labor, when in reality the distributions are varied greatly as shown in exhibit 5 indicating a much higher usage for Flow Regulators. The difference between the above and the revised methods is that overhead is allocated as a percentage of materials used. Pumps use a lot less material, but their usage of labor is ignored and as such, they appear much cheaper than they actually are. 3. Looking at the below chart, we see that the margins are, for the most part, vastly...
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...Anexo 1 - Analisis rentabilidad en productos (dólares) Valvulas Bombas Reguladores de flujo Costes unitario estandar 37,56 63,12 56,5 Precios de venta fijados 57,78 97,1 86,96 Margen bruto previsto (%) 35% 35% 35% ULTIMO MES Precio de venta real 57,78 81,26 97,07 Margen bruto real (%) 35% 22% 42% Valvulas Bombas Reguladores de flujo % ingresos compañía 24% 55% 21% Margen bruto prev. Ponderado 8% 19% 7% 35% Margen bruto real. Ponderado 8% 12% 9% 29% Anexo 2 - Resumen de productos y costos mensuales (dólares) Valvulas Bombas Reguladores de flujo Total mensual Prod. Mensual (unid.) 7.500 12.500 4.000 Ciclos 1 5 10 Envíos mensuales (unid.) 7.500 12.500 4.000 Cantidad envíos 1 7 22 Costes fabricación Material Cantidad de componentes 4 5 10 Total costo componentes 16 20 22 458.000 $$ Mano de obra (16 $ x hora) Hs MOD puesta a punto x ciclo de fabricación 8 8 12 168 horas hombre Hs MOD por ciclo x unidad 0,25 0,5 0,4 9.725 horas hombre Hs Utilización Maquinas x unidad 0,5 0,5 0,2 10.800 horas maquina Gastos generales de fabricación ...
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...First, remember that, with this case, we are addressing the “second stage” of the cost accounting effort. During this stage we “attach” a mission center’s costs to the products that pass through it. This is quite easy if all prod- ucts are the same, but more difficult if there is a mix of products. For example, in the Owen Hospital situation in the lecture, all dialyses were the same, so all we needed to do was divide the mission center’s total costs by the number of dialyses to get a cost per dialysis. However, in Destin Brass, there are three distinct products that pass through the mission center, such that the cost attachment effort is more complicated. Second, it is quite easy to attach direct material and direct labor to any given product. These can be computed at standard and are unambiguously associated with each product. For example, the direct material cost of a valve is $16.00 and the direct labor cost of a valve is $4.00. Third, there are two kinds of indirect costs in any given mission center that must be attached to the center’s products: (a) costs that are direct for the mission center but indirect with respect to any given product, it produces, and (b) costs that have been allocated into the mission center from a service center. In the Jefferson Multi-Media case, an example of the former would be the administrative salaries in the division; these salaries are a direct cost of the division, but indirect for any given product (such as a CD). An example of the latter...
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...Hechos * Una gama de tres productos que se fabrican con el mismo proceso, solo se diferencian en la cantidad de materia prima y las horas mano de obra: * Válvulas: 24% de los ingresos, se requerían en un ciclo/mes y cuatros componentes * Bombas: 55% de los ingresos, se requerían cinco ciclos/mes y cinco componentes. * Reguladores de Caudal: 21% de los ingresos, se producían en cinco ciclos/mes, para producir 4000 unidades y requerían más componentes y mano de obra que las bombas. * El proceso de fabricación cada operario podía manejar dos máquinas y otras actividades. * No tienen competidores en las ventas de Reguladores. * Han subido el precio de los reguladores en un 12.5%. * El objetivo era intentar comprender las tendencias de los competidores y de desarrollar nuevas estrategia para hacer frente a esta problemática. * John, atribuye el problema a que la posibilidad de que los competidores no conozcan el valor exacto de sus costes totales. * Peggy, la controller, alega que el sistema que usan actualmente para asignar los costes es “tradicional e insuficientes” * La propuesta es cambiar la forma de asignación de costos que hasta ahora los prorratea basados en el volumen de producción de cada producto, estén basados en las actividades específicas del proceso de fabricación, lo que permite una distribución diferente de os costos indirectos de producción. Problema Determinar los costes de sus productos a través de un mejor...
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...Hannah Guthy Destin Brass Products Co. Case Write-up 1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs to estimate product costs for valves, pumps, and flow controllers. | Total | Valves | Pumps | Flow Controllers | Manufacturing Costs: | | | | | Material Cost/Unit | | $16 | $20 | $22 | Units/Month | | 7,500 | 12,500 | 4,000 | Material Cost/Month | | $120,000 | $250,000 | $88,000 | Labor Costs: | | | | | Production Runs/Month | | 1 run | 5 runs | 10 runs | Set-up Labor Hours/Prod. Run | | 8 hrs | 8 hrs | 12 hrs | Run Labor Hours/Unit | | .25 hrs | .50 hrs | .40 hrs | | | | | | Set-up Labor Hours/Month | | 8 hrs(1 run*8 hrs) | 40 hrs(5 runs*8 hrs) | 120 hrs(10 runs*12 hrs) | Run Labor Hours/Month | | 1,875 hrs(7,500 units*.25 hrs) | 6,250 hrs(12,500 units*.5 hrs) | 1,600 hrs(4,000 units*.4 hrs) | Labor Cost/Hour | $16 | | | | Set-up Cost/Month | | $128($16*8 hrs) | $640($16*40 hrs) | $1,920($16*120 hrs) | Run Labor Cost/Month | | $30,000($16*1,875 hrs) | $100,000($16*6,250 hrs) | $25,600($16*1,600 hrs) | Machine Usage Costs: | | | | | Machine Usage Hours/Unit | | .5 hrs | .5 hrs | .2 hrs | Machine Usage Hours/Month | 10,800 hrs | 3,750 hrs | 6250 hrs | 800 hrs | Machining Usage Cost/Month | $25 (machine depreciation/hr) | $93,750(3750 hrs*$25) | $156,250(6,250 hrs*$25) | $20,000(800 hrs*$25)...
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...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...
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...MEMORANDUM TO: Destin Brass Products Co. FROM: Brett Davis, Paul Gorski, and Sarah Wisenbarger DATE: September 17, 2015 SUBJECT: Analysis of Destin Brass Products Co. ------------------------------------------------- The purpose of this memorandum is to analyze the product costing of pumps, valves, and flow controllers at Destin Brass Products Co. Destin Brass supplies three products for high-quality brass boat fittings. Currently the most revenue is coming from the production of pumps; however, due to the fact that competitors are dropping their prices there is a concern for how to maintain the gross margin for pumps. With the adjustment in costs gross margins have dropped from the planned margin of 35% to 22% in just one month. To offset this potential damage we are taking a look at how to adjust product costs in order to stay in the competitive pump market. Below lists the product costs using activity based costing, recommendations for adjusting the price of flow controllers, and how these changes in product costing affects net income. Activity based costing allows for as many costs as possible to be directly related back to where it was used in production. Under the activity based costing the new product costs for valves, pumps, and flow controllers are $37.81, $48.82, and $100.48 respectively (see Exhibit 1). These product costs are found by adding together the direct material, direct labor, and overhead allocation for each product. Overhead allocation...
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...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...
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...Unit 5 Research Project Terra O’Brien Destin Brass Products Company is concerned with its level of competition and their product costing system. Peggy has discussed some of the issues facing the company with Roland and John. The following are overhead activities and the cost drivers associated with them: Overhead Activities | Cost Driver | Machine depreciation | Increases with the amount of machine usage | Setup labor | Increase with the amount of setup hours. | Receiving | Increases with the amount of shipments received | Materials handling | Increases when products are produced and shipped | Engineering | Increases with amount of products produced | Packing and shipping | Increase with amounts of products sent out | Maintenance | Increases with the amount of machine hours used | After recalculating the costs with regards to the level of activity required by each product line, it was found that the prices charged for each product may not be appropriately aligned with the amount of resources required for each one. Specifically, valves and pumps are somewhat overpriced, flow controllers are underpriced. This discrepancy in pricing is due to how overhead is allocated to each product line in the different methods. It is clear from Exhibit 5 that flow controllers consume greater than 50% of the resources per month, with the exception of machine time (7%). However under the Standard Unit Cost and Revised Standard Cost methods, the other two product...
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...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%...
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