Wilkerson Co.

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Wilkerson’s competitive situation is that of declining profits due largely to chronic and severe price-cutting on pumps, the company’s main product in terms of units produced (Exhibit 4). Being a standard commodity product, demand for pumps is price elastic, and customers look for the cheapest price irrespective of the company they buy from. With its competitors constantly lowering their prices, Wilkerson’s only option for remaining competitive in the pump market was to match these price cuts. As a result, the actual selling price of pumps is $87, well below the target selling price of $107.69 (Exhibit 2). Consequently, Wilkerson’s actual gross margin of 19.5% on pumps is well below the company’s uniform target line of 35% for all products. When period costs such as selling, general and administrative expenses are factored in along with taxes, it is quite likely that selling pumps is losing the company money according to their standard unit costs. The high unit costs for pumps relative to Wilkerson’s two other products, valves and flow controllers, are rooted in the fact that pumps require .5 hours of direct labour per unit, whereas valves and flow controllers only require .4 hours per unit. With Wilkerson’s direct labour rate being $25/hour, the extra .1 hour of labour adds $2.50 to the direct labour cost for each pump relative to a valve or flow controller. This difference is compounded by Wilkerson’s overhead allocation method, 300% of direct labour. As a result, manufacturing overhead for pumps is $7.50 higher than for valves and flow controllers. When added to the extra $2.50 of direct labour costs, the unit cost for pumps is $10 higher than other products before any consideration of direct material costs. We will later explore the use of activity-based costing (ABC) to attempt to provide a more accurate analysis of Wilkerson’s overhead cost structure. In contrast to the poor performance of its pumps, Wilkerson’s other two product lines are doing...
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