Destin Bras Essay

893 Words4 Pages
Based on our discussion, we recommend your company: • In the short run: switch to ABC cost system and adjust its selling prices its selling price in a moderate pace. • In the long run: try to revise the current production process for flow controllers. Our team allocated costs based on activities performed. The results are presented in Exhibit 1. Compared to the traditional and the revised unit costs, the estimated costs using the activity based costing system are very different. The ABC system allocates costs that are caused by non-volume-based cost drivers and it breaks down the overhead cost to more pools. As a result, the new estimated overhead costs are more accurate because allocations of overhead costs are more precise. Under the ABC method, the unit costs of the three products are very different from the standard unit costs. (Exhibit 2)The unit cost of valves changes slightly; while unit costs of pumps and flow controllers change significantly. The unit cost of pumps is 23% lower and the unit cost of flow controllers -78% higher compared to the standard unit costs. Therefore, if the company wants to achive gross margin of 35%, the planned selling price of valves should be $58.08 which is close to its actual selling price. The selling price of pumps will have to be $75.19- $21.91 less than the target selling price under the traditional system, and the planned selling price of flow controllers should be $154.72, almost $57 more than its actual selling price. The ABC system provides more accurate cost allocations to each product. It also explains why competitors’ pump prices are lower and the company had almost no competition in the flow controller market. Most competitors were not able to compete with Destin Brass Products Co., because the company has been selling the flow controllers at $97.07 which is below its unit cost of $100.57.

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