June 26, 2010
CASE ANALYSIS OBJECTIVES
The Destin Brass Products Company case analysis focuses on the current accounting practices utilized by the company and its effects on product pricing. Destin’s president, Roland Guidry, is concerned about the pump market competition dropping prices and his company’s ability to remain competitive, yet profitable; since, pumps are 55% of Destin’s revenues. At the same time, the flow controller market remains seemingly untouched. The company’s controller, Peggy Alford, and manufacturing manager, John Scott, are charged with experimenting with a new accounting method that could more precisely cost each of Destin’s three products: valves, pumps, and flow controllers.
Destin Brass Products Company was founded by Guidry, Scott, and Steve Abbott, the current sales and marketing manager. After a conversation with the president of a large water purification equipment manufacturer, Abbott discovered an opportunity to produce high quality brass valves since the manufacturer was dissatisfied with the quality of brass valves currently available. Scott was known for his ability to create high-quality brass boat fittings for the fishing industry. Guidry was a veteran with a history of successful ventures, and Alford had manufacturing accounting experience. Thus, Abbott’s vision came to fruition when the group purchased a commercial machine shop in 1984.
Scott noted the mistakes of existing valve makers and decided that a skilled labor force, expensive machinery, or both, were required to maintain the necessary tight tolerances. Before long, Destin became the sole supplier of valves to its customer. Individual components were bought from foundries, with a just-in-time delivery agreement. After delivery, the pieces were precisely machined and assembled.
Yet, two Destin founders had bigger dreams than solely manufacturing valves. A market for brass pumps and flow controllers existed, which required the same skills and machinery as the valves. Thus, a newly created engineering department designed the two new product lines and the same skilled work force and machinery was utilized. Destin hoped to gain a competitive advantage due to Scott’s brass experience and an expanded product line.
Consisting of four brass components, the valves were automatically machined; therefore, a single machinist could operate two machines and assemble the valves simultaneously. The high expense of precise machining made the specialty valves noncompetitive in the regular valve market. Therefore, all monthly production was done at once and shipped directly to the company’s single customer. Valves accounted for 24% of Destin’s revenues and gross margins maintained a standard of 35%.
The manufacturing process for pumps almost mirrored that of valves, but five components were required rather than four. Five monthly production runs met the demands of seven industrial distributors, as long as prices remained competitive. Destin felt the strain of lowering their pump prices in order to remain in the market; thus, resulting in a 22% gross margins in the last month, far below the planned gross margin of 35%, but 55% of their revenues.
Flow Controllers require more components, and more labor hours, but the physical manufacturing process is similar to the valves. In recent months, ten production runs resulted in 22 shipments to distributors and other customers. Unlike the pump market, price competition for the flow controller is mild. Destin Brass was able to raise prices by 12 ½% with no obvious affect on demand. Flow controllers make up 21% of the company’s revenues.
After the latest month’s reports were completed, the group of four met to discuss the results. With higher quality manufacturing capabilities than many competitors, the group could not grasp how the competition could lower prices on pumps and...