Destin Brass Case Analysis

2. Compare the estimated costs you calculate to existing standard unit costs (Exhibit 3) and the revised unit costs (Exhibit 4). What causes the different product methods to produce such different results.

As is typical when implementing ABC, product costs have been shifted from the high-volume products to the low volume products. This is illustrated in the Destin Brass case as the traditional and revised methods allocated the overhead rate as a percentage of total run labor and machine hours respectively. These costs are spread evenly across all the products, even though the majority of total labor goes towards Flow Controllers. Flow controllers are also responsible for more production runs, more shipping, and more engineering. In essence, there are many more transactions associated with the Flow Controllers.

3. What are the strategic implications of your analysis? What actions would you recommend to the managers at Destin Brass Products Co?

Destin Brass has a set goal of a 35% profit margin across all three products. For Valves, we would recommend no changes as Gross Profit Margin is similar in both the traditional and ABC costing methods.

For Pumps, we would recommend that the company lower prices to become more competitive in the marketplace, if needed. In fact, lowering the price to $75 would still yield a profit margin of 35% if we were using ABC for the base cost per unit. This is more than a $6 decrease in their current selling price and could potentially help Destin Brass capture more market share. Since pumps represent more than 55% of Destin's revenues, it is critical that they stay competitive in this market. If anything, this information sheds light on why Destin's competitors were able to sustain lower prices.

As for Flow Controllers, Destin finally figured out why they are the only game in town! No competitor would jump into the market when Destin is selling below cost. Even with the 12 ½ percent price increase, Destin has a -5% profit margin with ABC costing. If Destin were to keep in line with its goal of a 35% profit margin across all products, they would need to increase the selling price of Flow Controllers to $155. This, however, poses two risks. First, they may lose some business as companies stretch the useful life of Flow Controllers they have instead of purchasing new ones. Second, raising prices this drastically and showing large profits may convince other competitors to jump into the market. This would inevitably lead to pressure on the selling price. So, for Flow Controllers, we suggest that Destin rethink their goal of across-the-board 35% margins and sell them for a lower margin. This would maintain Destin as a one-stop-shop company for all three products.

4. Assume that interest in a new basis for cost accounting at Destin Brass Products remains high. In the following month, quantities produced and sold,