Destin Brass Products Co. Essay Example

Destin Brass Products Co. Essay Example Destin Brass Products Co. Essay Destin Brass Products Co. Essay Case Study: Destin Brass Products Co. Hsien-Da Lin 003253093 1. By using activity-based costing method, we can reallocate the overhead costs into three product lines based on four activities, which are numbers of used set up labor hours, percentage of transaction and machine usage, and numbers of machine hours used. Next, we add up the direct material, direct labor and overhead costs of each product line. After that, we divided the results by total production units. We get valve unit cost=$37. 70, pump unit cost=$48. 9, flow controller unit cost=$100. 91. ( see table 1) 2. Standard unit costs and revised unit costs both show that the highest product cost is pump product line. However, our transaction-based analysis shows it should be the flow controllers. We can tell that the unit costs have been badly distorted as a result of using single allocation basis (production-run labor cost). Through activity-based costing, we can be able to more accurately assign overhead costs to each prod uct, which means the result can effectively reflect the actual costs on each product line. 3. The strategies that I would recommend to the company are: a. Cutting the price of pumps to better compete with other suppliers in the market. Comparing the product cost between the new activity-based system and traditional system, we can easily find out that the company has been overestimated the pump cost. Thus, they thought the profit margin should be merely 22%. By reallocating the overhead costs more accurately, we found the profit margin should be doubled to 40%. (Table 2) The number shows that the profit margin of pump is much higher than their estimation. Besides, the competitors in market have been cutting prices to attract more customers and opportunities. We suggest the company should start cutting the pump price to better compete with those pump suppliers in the market. b. Increase the price of flow controllers or give up the product line: First of all, after calculating the actual cost of flow controller by activity-based cost method (see table 2), we realized that Destin Co. has been â€Å"underestimated† the controller cost by $44. 41. The company’s current system made them believe the product has 42% gross margin when the actual margin is -4%. The company has been losing money in this product line without knowing the fact. They claimed that they once raised the price by 12. 5% with no apparent effect on demand. This reveals two possibilities: 1. There is still room for the company to raise their price to earn more profit. By setting the new price $155. 25, they can reach 35% profit margin. 2. The price was too low for other competitors to enter the market because Dustin, Co. has been miscalculated the cost. Under this circumstance, if they should also consider getting out of the market to stop losing money. Conclusion: By adapting the new pricing strategies, the company can earn $696,338. 85 gross profit comparing to the $541,092. 00 when using the traditional price setting. (See table 3). However, if the flow controller market demand decreases significantly after raising the prices, they can quit the market immediately to avoid losing money on this product line. 4. The net income will not change, because the activity-transaction-based system only provides different individual cost. The total cost of good sold and sales will be the same under the two methods. Table 1 Table 2 Table 3