Destin Brass Products Co., was facing competition in brass pumps market due to low prices set by competitors. The company started in 1984 used to manufacture only valves initially but started brass pumps and flow controllers because they required the same manufacturing skills.
Valves represented 24% of the total revenue of the company and had a gross margin of 35%. Destin was manufacturing 7500 units per month
Pumps (55% of the revenues) also required the same setup. The targeted margin was also 35%. But recently the competitors the competitors have started reducing prices which has forced Destin Brass Products Co. to reduce their price also. This has resulted in reduced gross margin of 22% which is also expected to go down in the future. The production for pumps was 12500 units per month.
Flow controllers contributed to rest 21% of the revenues. Destined manufactured 4000 units in the previous month. In this segment they did not face any competition and had recently increased their prices by 122% with no apparent effect on demand.
The competitors may be using a different method of accounting whereas Destin is using the standard method of accounting. This might have resulted in the lower cost of pumps for the competitors.
Following economics concepts have been used in the case
The process by which overheads are finally included in the cost of production of product.
2. Absorption costing:
The process of costing in which overheads are absorbed in product cost using some suitable method.
The process of charging overheads that are wholly associated with a particular cost centre to that centre.
The process by which shared overheads are divided between related cost centres on an equitable basis.
5. Activity based costing: