Destin Brass

Destin Brass

Destin Brass Products Company decided to understand its cost for its three products: valves, pumps, and flow control. Controller of the company, Peggy Alford, discussed some of her ideas about costs with Roland Guildry, the president of the company, and John Scott, the manufacturing manager. The main concern was that the competition was acting not logically according to their previous understanding of costs.

After calculating the activity-based costs of the company, related to the three types of products, we found that the competition was right about their recent decisions, and that the pricing of the products is not done properly in relation to the real costs of those products. The results in Exhibit 1 show that the flow controllers are underpriced, that the pumps are overpriced, and that the valves are priced correctly according to the margins that were set by the company (35%). The ABC method helped us to understand why the competition is pricing their pumps lower. It also helped us to see how the competition still has healthy margin why it is pricing its products below the traditional model costs that Destin Brass Products Co. used. The method also helps to understand why the flow controllers market is not popular. The exit barriers are set too high, because the product sold by the Destin Brass is priced lower than its present cost. For Destin Brass it is possible, because it has other products that bear the difference in price and cost of flow controllers for now.

Our calculation for activity-based unit costs can be found in Exhibit 2. The three costing methods allocate overhead differently, changing the overall product cost. After we analyzed Exhibit 1, we recommend the management of Destin Brass to change the pricing for pumps and flow controllers. To meet the target gross margin of 35%, the company needs to change the price of the flow controllers from $97.07 to $154.72. After that change, the company can change the price of their...