Destin Brass Case Solution
Destin Brass Products
Problem: -
The Company is producing 3 major products – Valve, Pump and Flow Controller. The Company is concerned about the price cutting of Pumps going on in the market every month. It is also surprised to see no change in sales of Flow Controller despite 12 ½% increases in prices.
Current Scenario: -
Currently it is using traditional accounting system, Unit of product is charged for material cost, labor cost (standard time for labor times the labor pay rate $16 per hour) and overhead cost. OH cost assigned to production on basis of production run labor cost.
Revised Method:-
The better approach to allocate overhead cost is Activity Based Costing along with the cost related to those transactions. First identifying activities - such as receiving, handling material, packaging, engineering, maintenance. The transactions required for each activity needs to be considered since the transaction causes OH costs to incur. New calculation for per unit cost is as follows: -
Activity Valve Pump Flow Controller Receiving 600 3800 15600
Material Handing 6000 38000 156000
Packaging and Shipping 1800 13800 43800
Enginnering 20000 30000 50000
Maintenace 10500 17400 2100
Machine Depreciation 94500 156600 18900
Set-up Cost 128 640 1290 Total OH cost per unit 17.80373 20.8192 71.9225 Direct Material Cost 16 20 22
Direct Labor Cost 4 8 6.4 Total Cost per unit 37.80373 48.8192 100.3225 Actual Selling Price 57.78 81.26 97.07
Mark up 34.57298 39.92222 -3.350674771
Previously calculated Mark up 35 22 42
According to new figures actual Mark-up of Pump (40%) is much higher than previously calculated (22%). Hence there is scope for reduction of prices of Pumps. Conversely mark up of Flow Controller (-3.35%) is much lesser than previous one (42%). There is need to further increase prices of Flow Controller.
Conclusion:-
Company should further reduce prices of Pumps to meet the market competitions as
Problem: -
The Company is producing 3 major products – Valve, Pump and Flow Controller. The Company is concerned about the price cutting of Pumps going on in the market every month. It is also surprised to see no change in sales of Flow Controller despite 12 ½% increases in prices.
Current Scenario: -
Currently it is using traditional accounting system, Unit of product is charged for material cost, labor cost (standard time for labor times the labor pay rate $16 per hour) and overhead cost. OH cost assigned to production on basis of production run labor cost.
Revised Method:-
The better approach to allocate overhead cost is Activity Based Costing along with the cost related to those transactions. First identifying activities - such as receiving, handling material, packaging, engineering, maintenance. The transactions required for each activity needs to be considered since the transaction causes OH costs to incur. New calculation for per unit cost is as follows: -
Activity Valve Pump Flow Controller Receiving 600 3800 15600
Material Handing 6000 38000 156000
Packaging and Shipping 1800 13800 43800
Enginnering 20000 30000 50000
Maintenace 10500 17400 2100
Machine Depreciation 94500 156600 18900
Set-up Cost 128 640 1290 Total OH cost per unit 17.80373 20.8192 71.9225 Direct Material Cost 16 20 22
Direct Labor Cost 4 8 6.4 Total Cost per unit 37.80373 48.8192 100.3225 Actual Selling Price 57.78 81.26 97.07
Mark up 34.57298 39.92222 -3.350674771
Previously calculated Mark up 35 22 42
According to new figures actual Mark-up of Pump (40%) is much higher than previously calculated (22%). Hence there is scope for reduction of prices of Pumps. Conversely mark up of Flow Controller (-3.35%) is much lesser than previous one (42%). There is need to further increase prices of Flow Controller.
Conclusion:-
Company should further reduce prices of Pumps to meet the market competitions as