Case Study: Destin Brass Products Co. Hsien-Da Lin 003253093 1. By using activity-based costing method, we can reallocate the overhead costs into three product lines based on four activities, which are numbers of used set up labor hours, percentage of transaction and machine usage, and numbers of machine hours used. Next, we add up the direct material, direct labor and overhead costs of each product line. After that, we divided the results by total production units. We get valve unit cost=$37.70, pump unit cost=$48.79, flow controller unit cost=$100.91. ( see table 1)
2. Standard unit costs and revised unit costs both show that the highest product cost is pump product line. However, our transaction-based analysis shows it should be the flow controllers. We can tell that the unit costs have been badly distorted as a result of using single allocation basis (production-run labor cost). Through activity-based costing, we can be able to more accurately assign overhead costs to each product, which means the result can effectively reflect the actual costs on each product line.
3. The strategies that I would recommend to the company are: a. Cutting the price of pumps to better compete with other suppliers in the market. Comparing the product cost between the new activity-based system and traditional system, we can easily find out that the company has been overestimated the pump cost. Thus, they thought the profit margin should be merely 22%. By reallocating the overhead costs more accurately, we found the profit margin should be doubled to 40%. (Table 2) The number shows that the profit margin of pump is much higher than their estimation. Besides, the competitors in market have been cutting prices to attract more customers and opportunities. We...
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