Wilkerson Case
1. Wilkerson company ‘s major productions are pumps, valves and flow controllers.
Pumps: The competitors had been reducing prices on pumps. Since pumps were a commodity product, the company matches the reduced prices to maintain volume. However, it has dropped pre-tax margin to less than 3%.
Valves: Although several competitors could match its quality, none had tried to gain market share by cutting price, the gross margin had been maintain at standard 35%.
Flow controllers: There was much more variety in the types of flow controller used in industry, so may more production runs and shipments were performed for this product line. However, Wilkerson had recently raised flow controller prices by more than 10% with no apparent effect on demand.
Overall: The Company’s profit decline and face price competition for pumps and overhead costs has become much larger than the direct labor expense.
2. No, the executives should not abandon overhead assignment to individual products entirely. Because the assigning overhead cost to each product line is reasonable to reflect the cost of each product. Setting prices base on product-line contribution margins is not very accurate. Because it could underestimate the cost without including overhead cost and thus it could set lower price and with lower profits.
3. Wilkerson currently uses a simple cost accounting system. Each unit of product was charged for direct material and labor cost. The cost drivers for direct material cost and direct materials are reasonable and feasible. However, the overhead costs were allocated to products as percentage of production-run direct labor cost, it could not accurately reflect the actual overhead cost for each product line. For example, valves’ machined components could be machined automatically, it require less labors. In addition, the machine-related expense might relate more to the machine hours of a product than to its production-run labor hours.
4. The difference between the activity-
Pumps: The competitors had been reducing prices on pumps. Since pumps were a commodity product, the company matches the reduced prices to maintain volume. However, it has dropped pre-tax margin to less than 3%.
Valves: Although several competitors could match its quality, none had tried to gain market share by cutting price, the gross margin had been maintain at standard 35%.
Flow controllers: There was much more variety in the types of flow controller used in industry, so may more production runs and shipments were performed for this product line. However, Wilkerson had recently raised flow controller prices by more than 10% with no apparent effect on demand.
Overall: The Company’s profit decline and face price competition for pumps and overhead costs has become much larger than the direct labor expense.
2. No, the executives should not abandon overhead assignment to individual products entirely. Because the assigning overhead cost to each product line is reasonable to reflect the cost of each product. Setting prices base on product-line contribution margins is not very accurate. Because it could underestimate the cost without including overhead cost and thus it could set lower price and with lower profits.
3. Wilkerson currently uses a simple cost accounting system. Each unit of product was charged for direct material and labor cost. The cost drivers for direct material cost and direct materials are reasonable and feasible. However, the overhead costs were allocated to products as percentage of production-run direct labor cost, it could not accurately reflect the actual overhead cost for each product line. For example, valves’ machined components could be machined automatically, it require less labors. In addition, the machine-related expense might relate more to the machine hours of a product than to its production-run labor hours.
4. The difference between the activity-