Destin Brass

Sarah Sievel

2/3/16

ACCT 6201

Destin Brass Case Analysis

Breaking down the margins of each product by the three different accounting methods provide very different takes on where revenue is coming from. While the Destin leadership team is under the impression that they are feeling a squeeze based on the competition driving the price of pumps down, they are actually still seeing 50% margins on that product according to the ABC accounting method and are not in danger of being priced out of the game, or even in danger of slipping below their planned gross margin of 35%. The standard unit cost accounting method would indicate that they are actually seeing a 22% margin which is concerning to them because they’ve had to adjust prices down to stay competitive, but we can see that the ABC analysis shows that this number is actually much higher and that this is still the highest margin product of the three (see table 4).

The standard accounting method made sense for Destin prior to expanding their product line, but we can see that the high costs associated with some of the activities for producing Flow Controllers have been hidden using this method and have led the company to believe that product line is less costly to produce than it actually is (see table 3).

One of the big concerns raised by the case was the question of how the competition was able to lower their prices on pumps and remain profitable. The standard unit costs (see table 1) indicate that it is more expensive to produce pumps. Using the ABC method we see that some costs associated with manufacturing flow controllers have been allocated to pumps falsely inflating their cost and raising concern about margins. The revised unit cost (see table 2) takes a step towards a more detailed cost breakdown but is still spreading engineering and packaging and shipping across the product lines in a way that masks how much of these resources are being used to produce the flow controllers.

The company has a few...