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Wilkerson Case Study Analysis

960 words - 4 pages

Wilkerson Company
Questions for Class Discussion

1. What is the competitive situation faced by Wilkerson?
Wilkerson’s competitors have cut prices on their pumps, in order to maintain market share, Wilkerson also cut the price of their pumps. This dropped Wilkerson’s GM by about 15%. At the same time, Wilkerson was able to increase the price of their flow controllers by 10% without a drop in demand.
The manufacturing manager now feels that the competitors’ valves are of equal quality as that of Wilkerson. Currently, the competitors have not changed their prices and GM has been maintained at 35%.
Wilkerson should be aware that its competitors could start dropping the prices of ...view middle of the document...

Overhead costs are figured proportionately to the direct labor costs at the rate of 300%.

4. Develop and diagram an activity based cost model using the information in the case. Provide your best estimates about the cost and profitability of Wilkerson’s three product lines. What difference does your cost assignment have on reported product costs and profitability? What causes any shifts in cost and profitability?
Overhead costs are not in proportion to the production output because of the method they are using. This leads to inaccurate pricing and costing decisions. An Activity Based Costing System would help find the real relationship between the products produced and overhead.

Cost pools > cost drivers > AB Cost Rate

Cost Pool Amount Driver Amount Rate
Machine Related Expenses 336,000 Machine Hours 11,200 $30/hr
Setup Labor 40,000 Prod Runs 160 $250/run
Rec & Prod Control 180000 Prod Runs 160 $1,125/run
Engineering 100000 Hrs of Eng Work 1250 $80/hr
Packaging & Shipping 150000 # of Shipments 300 $500/shipment

Activity-Based Cost Calc per Product

Product Valves Pumps Flow Controllers
Units 7500 12500 4000
Direct Labor 75000 156250 40000
Direct Material 120000 250000 88000
Total Direct Costs 195000 406250 128000
Manufacturing Overheads
Machine Related 112500 187500 36000
Setup Labor 2500 12500 25000
Rec & Prod Control 11250 56250 112500
Engineering 20000 30000 50000
Packaging & Shipping 5000 35000 110000
Total Manufacturing Overheads 151250 321250 333500
Total Cost
Allocation 346250 727500 461500

Comparing between Costing Methods

Method Existing Cost System Activity-Based Cost System
Product Valves Pumps Flow Controllers Valves Pumps Flow Controllers
Unit Produced 7500 12500 4000 7500 12500 4000
Standard Unit Cost $56 $70 $62 $46.17 $58.20 $115.38
Planned GM 35% 35% 35% 35% 35% 35%
Target Selling Price $86.15 $107.69 $95.38 $71.03 $89.54 $177.50
Actual Selling Price $86 $87 $105 $86 $87 $105
Actual GM...

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