WILKERSON CASE

VENKATARAMAN (1445646)

BY: BADRI

1. What is the competitive situation faced by Wilkerson?

Ans: Out of the product line of valves, flow controllers and pumps, Wilkerson is
facing stiff price wars in the Pump segment. Its competitors are continuously
reducing the price and Wilkerson is having to match this - leading to reduction in
the gross margin to about 20%. In the flow controllers segment, Wilkerson has
been able to increase the price without much impact. There have been no major
players competing with the flow controllers produced by Wilkerson.

2. Given some of the apparent problems with Wilkersons cost system,

should executives abandon overhead assignments to individual
products entirely, as some of Wilkersons competitors appear to be
doing? Would setting prices based on product-line contribution
margins be advisable for Wilkerson? Why or why not?
Ans: The problem with Wilkersons existing approach is that the cost driver of
production run- direct labor cost, used to assign the manufacturing overhead,
varies with each product. The gross margin from this approach will not show the
true value of gross margin. Also, some workers work on different machines
simultaneously, which again affects the correct value of gross margin. This is
because the actual machine hours is never accounted for.
The executives should not use the second method of treating manufacturing
overheads as period expense. This method is not appropriate for not customized
batch level production goods.

3. How does Wilkersons existing cost system operate?

Ans: The method used by Wilkerson presently is a job-costing system where
overhead rate is used to allocate the applied manufacturing cost. Currently they
use 300% overhead on direct labor hours to arrive at costs.
4. Develop an activity-based cost model using the information in the
case. Provide your best estimates about the cost and profitability of
Wilkersons three product lines. What difference does your cost
assignment have on reported product costs and profitability? What
causes any shifts in cost and profitability?
Ans: Wilkerson should choose the most appropriate cost drivers that reflect the
relationship between the volume of production of individual products and the

level of overheads. It can be said that machine hours is the appropriate cost
driver for the machine-related expenses cost pool and setup and receiving as
well as production control activities are changed in proportion to number of
production runs. Engineering cost is driven by hours of engineering work and
lastly packaging and shipment activity changes in proportion to the number of
shipments. Refer calculation provided along with the assignment.
With the help of Activity Based Costing, the company can analyze and infer
information about its products more accurately and better evaluate the
financials and gross margins. In the table attached, we can see that flow
controllers appear to be less attractive with negative margins as
compared to other 2 products valves and pumps.
The Company can still decrease the prices of valves and pumps and be
comparable to the industry to sustain the market position whereas in case of
flow controllers the company is already operating at a negative gross margin and
needs to increase the price if the product is to provide sustainable profits.

5. Based on your analysis for Question 4, what actions might

Wilkersons management team consider to improve the companys
profitability?
Ans: Based on analysis of the 2 costing methods, Wilkerson should move from
volume based costing to activity based costing to better analyze the cost figures
and health of the company. It will enable the overheads to be attached to the
products and activities where they are being consumed and not directly be
related to the products on the basis of production run direct labor hours. Also as
can be seen from the analysis of the 2 methods the gross margin returns vary
wildly in both the cases. The clear indicator of that is the flow controller that the
company manufactures. Volume based costing indicates that the product is
highly profitable providing a gross margin of 40.95% whereas the activity based
costing shows us that flow controllers are not providing any returns and on the
contrary it is a loss making product since we are unable to recover even the
costs involved.
Also, the company would be better off by taking quick action regarding the flow
controllers. They can either drop the product or increase its price. The longer
they sell at current level, greater the damage to the health of the company.

6. What concerns, if any, do you have with the cost estimates you
prepared in the answer to Question 4? What other information or
analysis would you want for better cost and profitability estimates?
Ans: Assumed average unit cost for individual flow controllers. Calculations are
done for a sample month in terms of capacity utilization. Costs of resources are
assumed to be constant over a given time. Administrative expenses are not

taken into consideration while performing the calculations. We are assuming that
all the goods are sold profitability may be incorrect. More information on cost
drivers will make this a better analysis.