Destin Brass Products Co Manufactures Three Products

Destin Brass Products Co manufactures three products: Valves, Pump and Flow Controllers. The company faces tough competition in the pump market, as their pumps lacks unique design advantage, which could make them more desirable. In order to stay in competition, Destin is forced to drop their pump prices. Pumps sales are important to the company as it drives almost 55% of the total revenue.

The company formulates various cost accounting methods to predict the production cost of each product unit. The standard unit method uses direct labor hours whereas the revised unit method uses machine hours to allocate their total overhead costs. Both these methods fail to account the actual cost of each activity associated with the production process of each unit. ABC costing method used is able to over-come this challenge.

On analyzing the cost for each unit product, it is deduced that valves and pumps are not only able to meet their targeted gross margin of 35% but are generating a gross margin of 53.24% and 66.55% respectively. These numbers show that the company has overly priced its Valves and Pumps values and reducing their prices further won’t affect the company’s targeted goal as they are well above the mark.

Destin Brass Product Co aims to be a larger entity with a wider range of products. The company aims to achieve a 35% gross margin on each of its product. However flow controllers, which were believed to generate large profit for the company, were actually producing a negative gross margin of -3.66%.

In order to meet its goal, the easiest way out would be if Destin discontinues the production of flow controllers (FC). But discontinuing the production line is not encouraged as I feel it will be hinder the ambitions of the company. Also, the direct costs connected with this product eventually will be absorbed by the other two-product line thereby, leading to an increase in the overall cost of production with a reduction in profit. .

Hence, strategies must be implemented to reduce the variable cost associated with this product. One way to do this is by focusing on decreasing the cost of material handling by at least 50%. This is because it is the most significant cost driving factor for this product. The company can also focus their attention on reducing the total number of shipping transactions (22), which account for almost 10% of the total cost of production. As FC products face no competition, the company must try increasing their price to at least its breakeven cost. This may work as the company has already increased the price of FC by 12.5% and this had no effect on the product demand showing that the product is underpriced.