Variable Cost
Cost management | Wilkerson Company Case | |
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
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