Essay About Destin Brass Case Solution And Cross-Functional Team

Destin Brass Case Solution
Historically, Destin Brass has successfully met its target gross margin of 35%. However, Destin’s
ability to meet this objective recently has been threatened by competitive pressure in the market for
pumps, its primary product. Destin has cut prices in order to retain its sales volume, but this has caused
gross margin on pumps to fall to 22%, well below the required 35%. In the case, the cross-functional team
seeks to identify the reason that competitors, but not Destin, have been able to cut prices on pumps. The
team also wants to know why Destin has achieved a 42% margin in the flow controller market without a
competitive response from rivals. Based on its intuitive knowledge of the production process, the team
has eliminated misguided competitor strategy and internal cost inefficiency as possible explanations.
The team therefore believes that Destin’s “traditional” accounting system is the problem. Destin’s
current system, standard unit costing, allocates overhead to the company’s three products using a single
allocation base, direct labor hours, but the controller doubts that this alone accurately explains overhead
costs. To test her theory, it is necessary to estimate the product costs under two alternative methods, a
revised unit cost method and an activity method, and observe if these values differ significantly from the
product costs estimated under standard unit costing. If so, the accounting system is likely the problem.
(Question 1) The estimated product costs for pumps, valves, and flow controllers are $37.75,
$48.87, and $100.57 (see Table 1). (Q2.) In contrast, under standard unit costing, the product costs are
$37.56, $63.12, and $56.50 (Exhibit 3), and under revised unit costing, the product costs are $49.00,
$58.95, and $47.96 (Exhibit 4). Valve unit costs are nearly the same as the traditional system, but the unit
costs under an activity system for the high-volume product (pumps) are significantly less and the unit
costs for the low-volume product (flow controllers) are significantly more than under the other two
methods. This is because both methods have misallocated overhead. Direct labor hours, a unit-level
allocation base, does not drive overhead