Wilkerson Company

Assessment 2 Individual By Andrew Chan WILKERSON COMPANY Overview Wilkerson participation is facing a decline in profits and has attributed this to a severe price cutting exercise in their Pumps line of products, dropping the companys pre-tax margin to less than 3%, far below the historically healthy 10% margins. It appears that gross margins on pump sales in the latest month had fallen below 20%, well below the budgeted gross margin of 35%.Although a recent increase to bleed dominances by 10% seems to devote been overlooked by competitors and have not caused an apparent effect on demand. Wilkerson had always practiced using a simple cost accounting transcription in their business. Cost Drivers Valves Pumps Flow comptrollers TOTAL Production 7 viosterol 12,500 4,000 24,000 Direct Labor 10 12. 0 10 visible Costs 16 20 22 Machine Hours 3,750 6,250 1,200 Production Run 10 50 atomic number 6 No. f Shipments 10 70 220 HrsEngineering 250 375 625 Direct Labor Expenses 75,000 156,250 40,000 $271,250 Direct Material Expenses 120,000 250,000 88,000 $458,000 Action Whilst a simple cost accounting system gives us the overall picture of the company, it doesnt truly reflect an accurate picture of the capital punishment of each product. In order to get a clearer picture of the situation, we need to examine the true relation of costs on each product establish on their activities. For this to happen, we need to use the ABC system to examine and identify the overhead costs of each product based on their activities. pic Machine pin down Up Receiving Engineering Shipping $336,000/ $40,000/ $one hundred eighty,000/ $100,000/ $150,000/ 11,200 160 160 1250 300 =$30 p/h =$250 =$1,125 p/run =$80 p/h =$500 p/ship Manufacturing viewgraph Using ABC Valves Pumps Flow Control TOTAL 303750 306250 301200 Machine 112,500 187,500 36,000 $336,000 112510 112550 1125100 Receiving 11,250 56,250 112,500 $180,000 80250 80375 80625 Engineering 20,000 30,000 50,000 $100,000 50010 50070 500220 Shipping 5,000 35,000 110,000 $150,000 25010 25050 250100 Set Up 2,500 12,500 25,000 $40,000 $151,250/ $321,250/ $333,500/ $806,000 7500 12,500 4000 Overhead Costs p/ building block using ABC $20. 17 $25. 70 $83. 38 Comparison between Simple Cost Accounting transcription and ABC System Simple Cost Accounting Valves Pumps Flow Controller Costs p/unit $56 $70 $62 Actual interchange Price $86 $87 $105 Actual Profit $30 $17 $43 ABC System Valves Pumps Flow Controller Costs p/unit $46. 17 $58. 20 $115. 38 Actual Selling Price $86 $87 $105 Actual Profit $39. 83 $28. 80 $(10. 38) Valves Pumps Flow Controller Simple Accounting Gross Margin 34. 9% 19. 5% 41% ABC Gross Margin 46. 3% 33. 1% -9. 9% bring out Findings The previously thought star product, the Flow Controller when using the ABC system is identified to be actually do poorly. The cost of producing the Flow Controller is higher then the actual selling price and producing a negative gross margin of nearly 10%. The Pumps product line which was causing the attention of management and blamed for dragging Wilkersons operating income to a 3% margin is in fact not doing badly. This may explain why competitors dropped their pricing. world a simple 4 machined component product to produce and can be shipped in large lots, Wilkersons Valves are doing extremely well and performing well above the targeted 35% gross margin. Recommendations Increase the selling price of Flow Controllers by 10% to $116, making the sale price and costs per unit to be of negligible difference. Monitor the results, review and suggestion is to continue the gradual price increase into profit territory over a 6-12 month period. trail price to Valves by 10% in order to capture market share as no competitors have tried. Based on March 2000 data, trading operations still have room to run at a higher capacity which in turn lowers per unit costs. t ake prisoner pricing on Pumps as the process of manufacturing is practically identical to Valves and the increase in production of Valves can be rolled over to Pumps and thus reduce costs per unit. Valves Pumps Flow Controller Costs p/unit $46. 17 $58. 20 $115. 38 New Selling Price $77 Hold $116 Target Profit $30. 83 Hold - Target gross margin 40% Hold 0% At Capacity Machine Set Up Receiving Engineering Shipping $336,000/ $40,000/ $180,000/ $100,000/ $150,000/ 12,000 180 180 1250 400 =$28 p/h =$222. 22 =$1,000 p/run =$80 p/h =$375 p/ship $336,000 $40,000 $180,000 $100,000 $150,000 Products MachineSet Up ReceivingEngineering Shipping Overhead $806,000