Destin Brass Products Company (“Destin”) was established in 1984 when Steve Abbott had sensed an opportunity after talking with a president of a large manufacturer of water purification equipment who was dissatisfied with the quality of the brass valves available. Soon after the formation of the company, Scott and his team were able to manufacture valves that met or exceeded the needed specification enabling them to acquire a contract with the purification equipment manufacturer and enabling them to turn a profit. Destin now manufactures valves, pumps, and flow controllers, all three of which are used in water purification systems.

Recently, it has become clear through their financial reports that competitors are using different strategies. Despite the fact that the competitors sell pumps at lower prices, they must still be making a profit, while Destin’s gross margin on pumps continues to decrease as they are forced to cut prices to keep up with the competition.

In a meeting with Destin leadership, that was held to come up with possible suggestions to work around the issue, they realized that competitors are not taking advantage of the opportunity for profit in flow controllers. In the meeting, Destin leadership decides to look into adopting a new accounting system that would allocate the cost of each resource to the products based on direct consumption by each product. Under this new accounting system, flow controllers appear even more profitable due to the way overhead costs are allocated. It is then pointed out that sometimes overhead costs cannot be traced directly to specific product lines and that these costs should be allocated on the basis of transactions.

In conclusion of the meeting, the controller is asked to come up with activity estimates and an overhead cost activity analysis to determine why competitors continue to lower their