Variable Cost

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Cost management|
Wilkerson Company Case
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1. What is the competitive situation faced by Wilkerson?
The competitive situation faced by Wilkerson is quite severe. Price cutting in its main product has led to a huge drop in profit. While price increase in another product line partially made up the loss. We will discuss the detailed situation line by line. (1) Valves

It was the first product line developed by Wilkerson and its high quality brought it a loyal customer base. Even if several competitors could match Wilkerson’s quality in valves, none had tried to gain market share by cutting price. Therefore the competitive situation for valves was not so fierce that Wilkerson could maintain its gross margin. (2) Pumps

Pump product line’s characteristic is high-volume and the manufacturing process for pumps was practically identical to that for valves. Due to the severe competitive situation for pumps, its market price has reduced continuously, so that Wilkerson had to match the low price to maintain its market share and sales volume. (3) Flow controllers

The biggest characteristic of flow controllers is customized, so that they required more components and more labor than the other two products, as well as more production runs and shipments. Due to variety of product and competitors’ overlooking, the price rise did not have apparent effect on demand.

2. Given some of the apparent problems with Wilkerson’s cot system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Why or why not? Given Wilkerson’s current situation, we consider that executives should not abandon overhead assignment to products entirely by adopting a contribution margin approach. Two conspicuous reasons are listed below. First of all, the biggest problem faced by Wilkerson’s executives was to figure out the profitability of each product line. Therefore, they must try to allocate overhead to each product line as detailed as possible, which means that treating the entire overhead as a period expense was not a sagacious decision. Moreover, the main advantage of variable costing system is to prevent executives from overproducing, which is not applicable for Wilkerson because of its just-in-time producing system. All in all, it is not a good choice for Wilkerson to abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense.

3. How does Wilkerson’s existing cost system operate? Develop a diagram to show how costs flow from factory expense accounts to products.
Engineering
$100,000
Engineering
$100,000
Packaging and shipping
$150,000
Packaging and shipping
$150,000
Setup
labor
$40,000
Setup
labor
$40,000
Machine-related
Expense
$336,000
Machine-related
Expense
$336,000
Wilkerson’s existing cost system operates as the following diagram. Receiving and production control
$180,000
Receiving and production control
$180,000

Production Cost
Centre
$806,000
Production Cost
Centre
$806,000

300% x Direct Labour Cost
300% x Direct Labour Cost

Direct material
Direct labour
Direct material
Direct labour
Valves, Pumps,
Flow Controllers
Valves, Pumps,
Flow Controllers

4. Develop and diagram an activity-based cost model using the information in the case. Provide your best estimates about the cost and profitability of Wilkerson’s three product lines. What difference does your cost assignment have on reported product costs and profitability? What causes any shifts in cost and profitability? (1) Activity-based cost model operates as the following diagram.

Manufacturing overhead
$806,000
Manufacturing overhead
$806,000

Machine-related
activities
$336,000
Machine-related
activities
$336,000
Setting up
machines
$40,000
Setting up
machines...
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