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Destin Brass Case Study

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The Destin Brass Products Co. was established at Destin, FL, in 1984. The company focuses on creating high quality brass content water purification equipments. There are three main products on the market for Destin Brass: Valves, Pumps and Flow controllers. The revenue share for each of the products are 24%, 55%, and 21% respectively.
Destin is facing some issues with its pumps. Due to the competitive pricing on the market, with competitors keep cutting theirs sales price, the contribution margin of pumps went from the estimated 35% down to 22%. The good news for Destin is that its flow controllers are doing really well in the market. Despite the price hike of the product, the demand for flow controllers doesn’t seem to have decreased. This suggests the potential for Destin Brass to continue to increase the price of this product and recover more gross margin.
STANDARD COST VS. ACTIVITY COST BASED
The current standard cost estimates do not accurately cost the products and are misleading in gross margin calculations. This is because of an assumption that all overhead is driven by direct labor only. Thus, overhead is spread across products through a sort of “peanut butter costing” approach. Even though, in reality, there are different pools of overhead activity and different factors that drive them. Activity Based Costing will improve these estimates by …show more content…

But in the long run, net income would be very different because costs of the products are very different under the two systems. Under standard costing, the total costs for valves, pumps and flow controllers are $37.56, $63.12 and $56.50 respectively. When applying the ABC system, the total costs for valves, pumps, and flow controllers are $37.74, $48.88 and $100.55 respectively. Destin needs to choose the costing system that most accurately represents their situation in order to make effective decision regarding price adjustments in the

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