Statement of Problem
The business organization whose analysis is presented in this case is Destin Brass Products Company that is involved in the production and sale of pumps. It is noticeable that there is stiff competition from the organization’s rivals who have been continually reducing prices on pumps therefore affecting the profitability of Destin Brass Products, as affirmed by Roland Giuidry, the President of the company. The organization does not have any unique design advantage as compared to its competitors in the industry and has forced the organization to also cut price so as to compete effectively with them (Crosson & Needles, 2010). However, this trend has made the firm to attain lower profits as compared to its previous operations. In fact the reduction in the prosperity of the organization prompted the management to hold a meeting so as to assess and comprehend the competitive trends in the market.
The management intends to develop appropriate competitive stratagems so as to deal with them and capture wider market region as well as increase sales and profits in the long run. It is indicated from this cased that recent operations of the organization seem less profitable since the prices of pumps have been declining drastically and this made the organization to match the lower prices or give up its place as a supplier of pumps. In fact it is affirmed that the gross margins on pumps sales in the latest month had reduced from the planned 35% to 22%. Though the organization also engages in the production of valves (24% of its revenue) and flow controllers (21% of its revenue), it is noted that the pumps generate the highest returns to the tune of 55%. The organization has even considered raising prices for flow controllers since a recent 12.5% price increase had not apparent effect on demand.
Executive Summary: Logical Solution to the Problem
The set-up labor cost ought to be allocated to the product line and then the machine hours be substituted for labor dollars so as to ensure that allocation of costs is conducted effectively. This means that it will be more efficient if the organization revamps its cost accounting system so as to include allocation of the indirect or overhead costs based on the departmental activities rather than basing on the volume of production (Daft & Marci, 2010). This means that all facets of production and all processes involved before the products are acquired by the consumer ought to be included in the activity based costing system as to ensure that appropriate gross profit margins are set. There is also a need to implement better marketing strategies so as to ensure that long term personal relationships are created between the consumers and the organization. Despite this, management of costs incurred ought to be a primary issue so as to enhance the profitability of the organization.
Analysis: Examples from Excel Spreadsheet to Support the Executive Summary
The information presented in this case is highly aligned to the costing system that is applied by Destin Brass Products Company so as to compete favorably with its rivals in the market. There is a need to re-design the costing system so as to ensure that the standard costs are ascertained based on the activities involved in the production and presentation of the commodity to the market for sale (Crosson & Needles, 2010). This means that the gross profit margins of the products can be re-drafted so determine the most profitable products and then utilize other marketing stratagems that can ensure that the business organization competes well with other firms while making substantial profits. Given that the organization engages in the production of three different but related commodities, there is a need to re-assess the costs that each of the departments utilizes in order to have the products offered to the consumers.
An assessment of the costing systems adopted by the rivals ought to be understood so that better decisions concerning determination of appropriate costs and setting of prices can be done. The excel computations indicate the traditional costing system that is currently being used by the organization in the determination of its costs (Daft & Marci, 2010). A comparison with the modern costing system as postulated by the controller of the organization indicated that pumps; that were viewed to be generating only 22% of gross profits were erroneous. His computations of allocating costs based on the departmental activities indicated that the pumps could have generated a gross margin of 27%. This means that the costing system adopted by any firm determines its decisions on pricing and the eventual projected profits both in the short run and long run periods of operation.
The product profitability analysis developed by the cost management accountant of Destin Brass Products Company based on the traditional costing system evoked worries among the managerial officers of the firm. This is because they were forced to engage in price reduction of the pumps and this made them to attain fewer profits as compared to the planned income for every sales period. The figure below gives a representation of the profitability analysis of the three product lines that the company offers based on the traditional costing system that it presently uses;
When these standard costs, selling prices and gross margins (both planned and actual) are compared with the revised costs, selling prices and gross margins under the modern costing system, it can be inferred that revamping the costing system will play an integral role in the enhancement of the success of the organization (Daft & Marci, 2010). This means that an assessment of the profitability of all the products can then be accurately established since the revised standard costs can aid in price setting as well as setting the gross margins. The computations in the excel spread sheet indicate that the revised standard costs for each of the unit products in the organization are not as they seem to appear (valves and flow controllers have a higher cost than pumps) as indicated below;
Revised Unit Costs
Flow Controllers
material
Material overhead (48%)
set up labor
Direct labor
Other overhead (machine hr)
Revised standard cost
This analysis implies that the gross profit margin derived from valves and flow controllers could be underestimated and there could be a need to increase their selling prices in the market. This will ensure that even if pumps generate less revenue due to the intense competition in the industry, valves and flow controllers can be used to mitigate losses. However, this cannot be suggested as the sole solution in this context given that pumps generate 55% of the total revenue for the firm (Daft & Marci, 2010). Transaction costing system can be used, though it might seem costly to refurbish the entire cost accounting system and then implementing the transaction costing method. Despite these, the benefits will be immense as accurate costs will be determined and ensure that prices are appropriately set to increase the organization’s profits.
Another imperative facet that ought to be considered by the organization is sales and marketing so as to capture wider market region. The organization has already diversified its product lines and therefore, it can capitalize on this opportunity by encouraging purchases through implementing sales promotion and advertising. Customer relationship marketing also ought to be adopted so as to attract potential clients while retaining the existing ones. This will not only aid in increasing sales but also developing brand loyalty for Destin Brass Products Company’s commodities (Daft & Marci, 2010).
Crosson, S & Needles, B. (2010). Managerial Accounting. Edition9PublisherCengage Learning.
Daft, R & Marci, D. (2010).Understanding Management. Edition6, New York: Cengage
Learning, 2008.
