Destin Brass Products Co.
Problem Statement: Destin Brass president Roland Guidry is concerned with the competitive trends of the company products. He and his staff are worried that company profits are falling in regards to these competitive problems.
Analysis:
Destin Brass Company manufactures three items dealing with water purification systems: valves, pumps, and flow controllers. The company has been seeing some problems dealing with competition within some of the product markets they produce. Ronald Guidry had two basic questions they wanted answered dealing with this case: 1. Why was it so difficult for the company to stay competitive in the pump market? 2. Why has the company not seen any competition in the flow controller market even with a recent raise in their price to consumers? These questions aroused from Guidry when he realized that the company wasn’t making the standard 35% gross profit margin in pumps. This was the case because the company was forced to reduce the selling price in pumps away from the target price ($97.10 to $81.26) due to stiff competition. Management also realized the excessive gross profit margin of 42% in flow controllers even after a recent 12.5% increase in price.
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The answer to the questions raised by management is directly related to how the company is accounting for their overhead relating to each product. The company had been using a traditional way of allocating overhead. (Exhibit 2) This was a simple and inexpensive way for the company to accomplish this task. However, it really didn’t accurately assign overhead to each product. Destin realized this and had it controller, Peggy Alford, design a revised way for allocating overhead. (Exhibit 3) This revised system didn’t seem to answer any questions or alleviate any problems that Destin was having. Activity Based Costing (ABC) was another possibility to allocate overhead and helps answer the questions above. (Exhibit 4)
Traditional Cost system: The
Analysis:
Destin Brass Company manufactures three items dealing with water purification systems: valves, pumps, and flow controllers. The company has been seeing some problems dealing with competition within some of the product markets they produce. Ronald Guidry had two basic questions they wanted answered dealing with this case: 1. Why was it so difficult for the company to stay competitive in the pump market? 2. Why has the company not seen any competition in the flow controller market even with a recent raise in their price to consumers? These questions aroused from Guidry when he realized that the company wasn’t making the standard 35% gross profit margin in pumps. This was the case because the company was forced to reduce the selling price in pumps away from the target price ($97.10 to $81.26) due to stiff competition. Management also realized the excessive gross profit margin of 42% in flow controllers even after a recent 12.5% increase in price.
[pic]
The answer to the questions raised by management is directly related to how the company is accounting for their overhead relating to each product. The company had been using a traditional way of allocating overhead. (Exhibit 2) This was a simple and inexpensive way for the company to accomplish this task. However, it really didn’t accurately assign overhead to each product. Destin realized this and had it controller, Peggy Alford, design a revised way for allocating overhead. (Exhibit 3) This revised system didn’t seem to answer any questions or alleviate any problems that Destin was having. Activity Based Costing (ABC) was another possibility to allocate overhead and helps answer the questions above. (Exhibit 4)
Traditional Cost system: The