Destin Brass Case
As Destin Brass products corporation grow, there are some problems coming out of it. In the beginning, they produce water purification valves with good revenues earned. Then they found out that they can use same machine and skills to produce brass pumps and flow controllers. But other companies lower the price of pumps ,which makes Destin have no choice. Also they increase prices of flow controllers by 12.5% with no apparent influence on demand. Therefore, they analyzed there might be some problems about their costing system.
Destin must lower the price as other company lower the price to maintain customers. So Destin s gross margins on pumps had fallen to 22%. They really want to find out what the problem is. We can see that company can get planned margin 35% on valves and more than planned gross margin on flow controllers about 42%. (Exhibit1) There are three costing methods that they want to use to solve this problem. The first one is the traditional method.( Exhibit 3)- standard unit costs. They use one single overhead rate to calculate unit cost by using one allocation base which is direct run labor cost. They get valves unit cost-$37.56, pumps-$63.12, flow controllers-$56.50. The second method is revised unit cost method which is a modern theory .They get valves unit cost-$49.00, pumps-$58.95 and flow controllers-$47.96. The allocation base is in 3 cost pools.At last, they use Activity based costing system to calculate cost by different activities,which will provide more detailed information to calculate and get more accurate reporting.They find every product overhead percentage of each activity by transactions.( Exhibit 5). Q1.Table one below, it shows that valves-37.7, pumps-48.8 and flow controllers-100.76.
Q2.Table two below, it shows that unit cost under revised method on valves is much more expensive than the other two methods. And flow controllers cost is much less expensive than other two methods.