Wilkerson Case

Hyeokchan Shin

Prof. Cheng

02/24/16

BMGT321

Wilkerson Company

Wilkerson Company mainly manufactures water purification equipment. The company’s profitability is resulting from the finished goods of pumps, valves, and flow controllers. However, the company has been experiencing the decline in profits. The overall pre-tax operating income has decreased from a historical rate of 10% to less than 3%.

Production process of Wilkerson Company can be simplified into three stages. The company first purchases the semi-finished components from suppliers. Then it machines these component parts and assembles them in the manufacturing facility. The production runs are scheduled to match the customer shipping requirements. Once the production is finished, the company ships product to customers by just-in-time shipping.

Among the three products in Wilkerson Company, valves are the original product line, which requires four different machined components. Also, its gross margin has been maintained at a standard 35%. The manufacturing process for pumps was very similar to valves. Wilkerson, however, lowered the prices so that it matches with competitors. The Gross margin on pump sales has fallen below 20%. The reason for matching the competitor’s price reduction is because they do not want to lose their title as a major pump supplier. Lastly, flow controllers require more components and labors compared to other two products. Also, there are more variety in the types of flow controllers used in industry. Wilkerson raised flow controller prices by 10%, but there was no effect on demand.

Wilkerson’s existing cost system is a simple cost accounting system. According to the case, the overhead costs were allocated to products as the percentage of direct labor cost. Each unit of product was charged for labor cost and direct material. In addition, variable costs for this company were only direct material and direct labor costs. The problem for this existing...