Destin Brass Case Solution

Historically, Destin Brass has successfully met its target gross margin of 35%. However, Destin’s

ability to meet this objective recently has been threatened by competitive pressure in the market for

pumps, its primary product. Destin has cut prices in order to retain its sales volume, but this has caused

gross margin on pumps to fall to 22%, well below the required 35%. In the case, the cross-functional team

seeks to identify the reason that competitors, but not Destin, have been able to cut prices on pumps. The

team also wants to know why Destin has achieved a 42% margin in the flow controller market without a

competitive response from rivals. Based on its intuitive knowledge of the production process, the team

has eliminated misguided competitor strategy and internal cost inefficiency as possible explanations.

The team therefore believes that Destin’s “traditional” accounting system is the problem. Destin’s

current system, standard unit costing, allocates overhead to the company’s three products using a single

allocation base, direct labor hours, but the controller doubts that this alone accurately explains overhead

costs. To test her theory, it is necessary to estimate the product costs under two alternative methods, a

revised unit cost method and an activity method, and observe if these values differ significantly from the

product costs estimated under standard unit costing. If so, the accounting system is likely the problem.

(Question 1) The estimated product costs for pumps, valves, and flow controllers are $37.75,

$48.87, and $100.57 (see Table 1). (Q2.) In contrast, under standard unit costing, the product costs are

$37.56, $63.12, and $56.50 (Exhibit 3), and under revised unit costing, the product costs are $49.00,

$58.95, and $47.96 (Exhibit 4). Valve unit costs are nearly the same as the traditional system, but the unit

costs under an activity system for the high-volume product (pumps) are significantly less and the unit

costs for the low-volume product (flow controllers) are significantly more than under the other two

methods. This is because both methods have misallocated overhead. Direct labor hours, a unit-level

allocation base, does not drive overhead