Wilkerson Company a supplier of products to manufacturers of water purification equipment is facing an apprehension because competitors had been reducing prices on one of the company’s main product line pumps. The president of Wilkerson Company Robert Parker was discussing operating results of the previous month with controller and manufacturing manager.
The product lines for the Wilkerson are pumps, valves and flow controllers. Pump is the major product line for Wilkerson. The company is forced to reduce its price of pumps as its competitors are lowering the price. Since they wanted to maintain the sales volume they are reducing their price which then lowers its gross margin. Wilkerson believes that its’ competitors are using overhead expenses as period expenses while Wilkerson uses it as product expenses. A study had also been organized to calculate the overhead cost as they are larger than that of the direct labor expense. The raw materials are purchased as semi-finished products which are later assembled in a manufacturing facility.
PUMPS: Five components are assembled to produce a pump. The gross margin in its latest month had fallen below 20%. Recently the price of the pump was increased by 10% without affecting its sales volume.
VALVES: The valves are designed uniquely. They have loyal customer base because of its high quality. Four machine components are assembled to produce a valve. It has a gross margin of 35%.
FLOW CONTROLLER: These are customized products. They require more labor and components for each unit of product produced. They were able to increase the price of the product by 10% without affecting the demand for the product.
QUESTIONS AND SOLUTIONS:
1. What is the competitive situation faced by Wilkerson?
The competitive situation varies for Wilkerson’s products. Pump and flow controllers are on the opposite sides of the spectrum.