Wilkerson Company

Assessment 2 Individual By Andrew Chan WILKERSON COMPANY Overview Wilkerson Company is face up a decline in profits and has attributed this to a severe outlay cutting exercise in their Pumps line of products, dropping the companys pre-tax margin to less than 3%, far below the historically hearty 10% margins. It appears that blunt margins on pump sales in the current month had fallen below 20%, sanitary below the budgeted perfect(a) margin of 35%.Although a recent augment to prey controllers by 10% seems to have been overlooked by competitors and have not caused an obvious effect on demand. Wilkerson had always practiced using a easy cost accounting system in their business. Cost Drivers Valves Pumps Flow Controllers be Production 7500 12,500 4,000 24,000 Direct Labor 10 12. 0 10 substantial Costs 16 20 22 appliance Hours 3,750 6,250 1,200 Production track down 10 50 100 No. f Shipments 10 70 220 Hrs engineering science 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 unanalyzable cost accounting system gives us the overall prototype of the company, it doesnt truly reflect an accurate picture of the performance of all(prenominal) product. In order to get a clearer picture of the situation, we need to hit the books the true relation of costs on each product found on their activities. For this to happen, we need to use the first principle system to examine and depict the overhead costs of each product based on their activities. pic simple machine Set Up Receiving Engineering Shipping $336,000/ $40,000/ $180,000/ $100,000/ $150,000/ 11,200 160 160 1250 three hundred =$30 p/h =$250 =$1,125 p/run =$80 p/h =$500 p/ship Manu itemuring knock 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 80 375 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 cd0 Overhead Costs p/ social unit of measurement using ABC $20. 17 $25. 70 $83. 38 similitude between Simple Cost Accounting arranging and ABC System Simple Cost Accounting Valves Pumps Flow Controller Costs p/unit $56 $70 $62 Actual Selling worth $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 charge $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% Key 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 Cont roller is higher then the actual marketing price and producing a negative gross margin of nearly 10%. The Pumps product line which was causing the concern of management and blamed for pull 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 continue the in small stages price increase into profit territory over a 6-12 month period. Cut price to Valves by 10% in order to get under ones skin market share as no competitors have tried. Based on March 2000 data, operations still have room to run at a higher capacity which in turn lowers per unit costs. hold open 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 frankincense 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