Destin Brass Products Co.Case Study Solution
Destin Brass was established in 1984 and have grown to produce valves, pumps and flow controllers. Valves comprise of24% of the company revenues, pump contains 55% and flow controllers account for 21% of the revenues. High competition in the market requires the understanding of costs and profits.
Valves
They were manufactured from four brass components. Their machines were very costly and were leading to the high cost of manufacturing. Destin Brass was the sole supplier of valves but did not have any specialization in this product. All products were produced in a single run production and then shipped to the customer.The company had set the standard of 35% gross margin and this product was meeting the goals of the company.
Pumps
The process of pumps was same as valves, it required five components including machining and assembly. After the completion of the process, the product was shipped to seven industrial distributors. High competition in this product was leading to price decrement. Each month, competitors were decreasing their prices and Destin did not have any special competitive advantage in this product, so Destin did not have any other option despite decreasing the prices. Gross margin in this product was 22% less than the standard of 35%.
Flow Controllers
It was used to regulate the rate and direction of the liquid.As compared to the other two products, more components in manufacturing are required in the process of flow controller and more labor as well and because of that its labor cost is the highest of all. There is no competition in this product, even Destin raised the price by 12.5%, but that did not bring any impact on the demand for the product. This product was giving them more profits than the other products and had more than the standard gross margin of 35%.
The purpose of the meeting was to discuss how to increase the gross margin in the pumps. Decreasing the price was leading to low gross margins. In the meeting, Peggy Alford was trying to convince the other two partners to use the modern approach of costing. Peggy also discussed with Scott earlier but didn’t get any response from him.
The competition was very high in pumps and that was leading to the low gross margin for the pumps.
Problems and issues with problems
The main problem facing the company was the decreasing operating margin of the pump product. Prices of pumps were under pressure from competitors. Recently after decreasing the price of pumps, operating margin have fallen by 13%, from 35% to 22%.
Issues
Peggy Alford was saying that competitors were using the modern approach of costing and it was giving them less cost per unit. This is why they were reducing their prices and while talking about Destin’s own costing method, it was using standard costing method that was giving It the highest cost per unit and its operating margin per unit was decreasing. If it continues using the same standard costing method then in future it might face losses as when a competitor would be decreasing prices and in pressure, it would need to do the same.
DESTIN BRASS PRODUCTS CO. Harvard Case Solution & Analysis
Analysis
Various costing options are available for managers
Standard-based costing
Standard costing method is a two-stage process. In the first stage, company incurred all the overhead costs to the production department and then in the second stage overhead cost was assigned on the basis of production run-labor cost. The labor run cost of $1 was leading to overhead cost of $4.39. In standard costing method, we don’t consider the material usage of the product. In standard costing, per unit of cost of the valve, pump and flow controller is $37.56, $63.12 and $56.50. While looking at the gross margin, in standard costing valve’s gross margin is 35%, pump’s gross margin is 22% and flow controller gross margin is 42%. (See Exhibit 1).......................
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