Group 7 B
Wilkerson Company
Introduction
Wilkerson Company is in the business of manufacturing valves, pumps, flow controllers etc. Severe industry wise price cuts in the pumps business, which is Wilkerson s major product line, has badly affected the company s margins (Gross Margin of 19.5% as against a planned gross margin of 35%). On the other hand the flow controllers division was performing above the expected profits (yielding a Gross Margin of 41%, a value higher than 35% estimated). Wilkerson needs to identify the proper mix of its product line to regain its profitability. This is to be done based on information provided in the case, regarding pricing decisions, decision to discontinue or continue a product and product design. A detailed analysis of the problems faced by Wilkerson Company is as follows.
Analysis
Based on the operating results of March 2000, we see that the company has grouped its overheads into 5 cost items, as below: Machine-related expenses Setup labor cost Receiving and production control Engineering Packaging and shipment Current Method - Volume Based Costing As per the given information, Wilkerson uses volume based costing system. Direct material and labor costs are based standard prices. Overheads are charged as 300% of the direct labor cost. This implies overheads are applied directly in relation to labor costs irrespective of relevance.
Table 1 - Margin Calculation for Volume Based Costing
Margin Calculation Planned Selling Price Actual Selling Price Per unit Volume Based Costing (Exhibit 2) Margin (based on Planned SP) Margin (based on Actual SP)
Valves 86.15 86 56 35.00% 34.88%
Pumps 107.69 87 70 35.00% 19.54%
Flow Controllers 95.38 105 62 35.00% 40.95%
Based on the volume based costing method we can clearly see that the Valves are performing within the planned margins, while Pumps are performing well below par (Gross Margin of 19.54% against expected 35%) and Flow controllers are performing above par...
