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Destin Brass Products Co.

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MEMORANDUM

TO: Destin Brass Products Co.

FROM: Brett Davis, Paul Gorski, and Sarah Wisenbarger

DATE: September 17, 2015

SUBJECT: Analysis of Destin Brass Products Co.
-------------------------------------------------

The purpose of this memorandum is to analyze the product costing of pumps, valves, and flow controllers at Destin Brass Products Co. Destin Brass supplies three products for high-quality brass boat fittings. Currently the most revenue is coming from the production of pumps; however, due to the fact that competitors are dropping their prices there is a concern for how to maintain the gross margin for pumps. With the adjustment in costs gross margins have dropped from the planned margin of 35% to 22% in just one month. To offset this potential damage we are taking a look at how to adjust product costs in order to stay in the competitive pump market. Below lists the product costs using activity based costing, recommendations for adjusting the price of flow controllers, and how these changes in product costing affects net income.

Activity based costing allows for as many costs as possible to be directly related back to where it was used in production. Under the activity based costing the new product costs for valves, pumps, and flow controllers are $37.81, $48.82, and $100.48 respectively (see Exhibit 1). These product costs are found by adding together the direct material, direct labor, and overhead allocation for each product. Overhead allocation is based on the activity for each item. For example, valves cause 3% of the total transactions for handling; therefore, valves are allocated 3% of the total cost for handling as their overhead. Using these activity percentages for each overhead determined the total amount of overhead for the month, which is then divided by the units produced in the month to obtain overhead on a per unit

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