Essay on Destin Brass Case Analysis

686 Words Jun 9th, 2011 3 Pages
Destin Brass is a large manufacturer of water purification equipment. Valves, pumps and flow controllers are three main products they make. The management was bothering by the rapid competition of valve market, wondering why their competitors can offer a lower sale price than theirs. In the end, they came up with the conclusion the cost allocation method was not accurate, and it led to the inappropriate pricing strategy.
The company uses three methods to compute the unit cost of each product—traditional cost method, revised cost method and activity-based cost method. Under traditional cost method, allocation of manufacturing overhead is simply based on direct labor. This method will be only precise when the overhead cost is highly
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As the cost is distorted, the gross margin is also incorrect. The gross margin for valves, pumps and flow controllers under activity-based cost method should be 34.70%, 39.94% and -3.85% respectively (Exhibit 3). Compared to traditional cost method, the gross margin for valves, pumps and flow controllers are 35%, 22% and 42%. These incorrect data made the management think flow controllers were making money, but in fact the company loses $3.74 by selling one unit of flow controllers.
Here are two suggestions the company can do to be more profitable: 1. Either increase the sales price of flow controller or cut down its cost: Since the competition in flow controllers’ market is weak, and the increase of sales price won’t affect the demand, the company can raise the sales price to cover the cost. The company can also reexamine the working process of flow controllers to see whether there is room for improvement. For instance, the components needed by flow controllers have increased material handling cost. The company may redesign the product by eliminating unnecessary parts. 2. Decrease the sales price of pumps and cut down its cost: By decreasing its price, even though the gross margin will decrease, Destin can gain more market share. Thus, the increase of sales may cover the decrease part of gross margin and might even gain more profit. Also, since the competition of market is so intense, the price of

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