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.
Q1) 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).

Valves Pumps Flow Basis

Controllers
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 Activity-Based
Packing & 0.83 3.10 38.76 Activity-Based
Shipping
Engineering 0.27 1.12 11.00 Activity-Based
Maintenance 2.67 2.40 12.50 Subjective
Machine 1.40 1.39 0.53 Activity-Based
Depreciation
ABC Standard 37.76 48.87 100.54 Machine
Cost Hour

Q2) 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?

Valves Pumps FC
Standard Unit 37.56 63.12 56.50
Cost
Revised Unit Cost 49.00 58.95 47.96
ABC Unit Cost 37.76 48.87 100.54

Q3) What are the strategic implications of your analysis? What actions
would you recommend to the managers at Destin Brass Products Co?
 - No change for Valves: under ABC, costs are roughly the same. Profit
Margin = 35%.
- Lower Prices for Pumps: Using ABC method, pump profit margin is 40%
which is higher than 22% as calculated by the old method. Prices can be
lowered to increase market competitiveness, until Profit Margin = 35%.
- Increase Price for Flow Controller: under ABC, costs exceed revenue
by 4% - target price should be $135.73. Since there are no significant
competitors, Destin can afford to raise prices
Q4) 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?

Valves Pumps Flow Total Income

Controllers ($)
ABC Standard 37.76 48.87 100.54
Cost

Unit Price 57.78 81.26 97.07

Profit Margin (%) 34.64% 39.86% -3.58%

Targeted Profit 35% 35% 35%

Margin

Net Income 150,128 404,839 -13,882 541,085

(ABC)

Previous Net 151,650 226,750 162,280 540,680

Income

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