Wilkerson Company

Assessment 2 Individual By Andrew Chan WILKERSON COMPANY Overview Wilkerson beau monde is facing a decline in profits and has attributed this to a intemperate value cutting exercise in their Pumps line of results, 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 menstruum Controllers by 10% seems to have been everyplacelooked by competitors and have not caused an apparent effect on demand. Wilkerson had always practiced using a simple cost accounting system in their business. Cost Drivers Valves Pumps come down Controllers TOTAL take 7500 12,500 4,000 24,000 Direct Labor 10 12. 0 10 Material be 16 20 22 Machine Hours 3,750 6,250 1,200 Production Run 10 50 100 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 exercise Whilst a simple cost accounting system gives us the boilersuit picture of the company, it doesnt truly reflect an accurate picture of the movement of each product. In direct to get a clearer picture of the situation, we take away to realize the true relation of be on each product based on their activities. For this to happen, we need to use the first principle system to examine and identify the overhead costs of each product based on their activities. pic Machine Set Up Receiving Engineering fare $336,000/ $40,000/ $ clxxx,000/ $100,000/ $150,000/ 11,200 one hundred sixty 160 1250 300 =$30 p/h =$250 =$1,125 p/ roll =$80 p/h =$500 p/ship Manufacturing Overhead utilise ABC Valves Pumps melt down Control TOTAL 30&2153750 30&2156250 30&2151200 Machine 112,500 187,500 36,000 $336,000 1125&21510 1125&21550 1125&215100 Receiving 11,250 56,250 112,500 $180,000 80&215250 80 &215375 80&215625 Engineering 20,000 30,000 50,000 $100,000 500&21510 500&21570 500&215220 transferral 5,000 35,000 110,000 $150,000 250&21510 250&21550 250&215100 Set Up 2,500 12,500 25,000 $40,000 $151,250/ $321,250/ $333,500/ $806,000 7500 12,500 4000 Overhead be p/ unit using ABC $20. 17 $25. 70 $83. 38 Comparison between Simple Cost Accounting System and ABC System Simple Cost Accounting Valves Pumps Flow Controller cost p/unit $56 $70 $62 Actual exchange footing $86 $87 $105 Actual Profit $30 $17 $43 ABC System Valves Pumps Flow Controller Costs p/unit $46. 17 $58. 20 $115. 38 Actual change Price $86 $87 $105 Actual Profit $39. 83 $28. 80 $(10. 38) Valves Pumps Flow Controller Simple Accounting Gross mete 34. 9% 19. 5% 41% ABC Gross Margin 46. 3% 33. 1% -9. 9% Key Findings The previously thought star product, the Flow Controller when using the ABC system is identified to be in reality do poorly. The cost of producing the Flow Controller is higher then the existing selling price and producing a negative gross margin of just about 10%. The Pumps product line which was causing the concern of management and beatified for dragging Wilkersons operating income to a 3% margin is in fact not doing badly. This may explain why competitors dropped their pricing. Being 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 come about the gradual price increase into profit territory over a 6-12 month period. Cut price to Valves by 10% in order to capture market share as no competitors have tried. ground on March 2000 data, operations still have room to phlebotomise at a higher capac ity which in turn lowers per unit costs. Hold pricing on Pumps as the process of manufacturing is practically very(a) 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 can Profit $30. 83 Hold - Target gross margin 40% Hold 0% At condenser 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 &8212&8212&8212&8212&8212&8212&8212 $336,000 $40,000 $180,000 $100,000 $150,000 Products MachineSet Up ReceivingEngineering Shipping Overhead $806,000