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GROUP E
(BRIEF CASE REPORT: WILKERSON COMPANY)
NAME:
221536
LECTURERS NAME:
PN ROHANA @ NORLIZA BT YUSSUF
SUBMISSION DATE:
27 OCTOBER 2015
Executive Summary:
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1.0 INTRODUCTION
Wilkerson Company is in the business of manufacturing valves, pumps and flow
controllers. Wilkerson is currently faces with declining profit margins relative to industry
competitors. The severe industry has price cutting in pumps business which is Wilkersons
major product line and has badly affected the companys margin. Gross margin on pumps
sales had fallen below 20% as against the companys planned gross margin of 35%. On the
other hand, the flow controllers division wan performing above the expected profits. Thus,
Wilkerson needs to identify the proper mix of its product line to regain its profitability. This
is to be done based on information provided in the case, regarding pricing decisions,
decisions to discontinue or continue a product and product design.
Knights team had collected the data based on the operating results of March 2000,
show that the company has grouped its overhead into 5 cost items which is:
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Machine-related expenses
Receiving and production control
Setup labor cost
Engineering
Packaging and shipment
Valves
$10.00
16.00
30.00
Pumps
$12.50
20.00
37.50
Flow Controllers
$10.00
22.00
30.00
$56.00
$70.00
$62.00
$86.15
35%
$107.69
35%
$95.38
35%
$86.00
34.90%
$87.00
19.50%
$105.00
41.00%
Cost Pool
Machine Hours
Production Run
Production Run
Engineering Hours
Number of Shipments
Rate
336,000/11,200 = 30
40,000/160 = 250
180,000/160 = 1,125
100,000/1,250 = 80
150,000/300 = 500
Product Costing
Machine Hrs
Machine Related Expenses (x30)
Valves
3,750
112,500
Pumps
6,250
187,500
Flow Controllers
1,200
36,000
336,000
Production Runs
Setup Labor Expenses (x250)
Receiving and production costs
(x1,125)
10
2,500
11,250
50
12,500
56,250
100
25,000
112,500
40,000
180,000
Engineering Hrs
Engineering Expenses (x80)
250
20,000
375
30,000
625
50,000
100,000
No of shipments
Packaging & Shipping Costs (x500)
10
5,000
70
35,000
220
110,000
150,000
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Total
806,000
Valves
Pumps
Flow Controllers
Production Units
7,500.0
12,500.0
4,000.0
10.0
12.5
10.0
16.0
20.0
22.0
11,250/7,500 = 15.0
36,000/4000 = 9.0
2,500/7,500 = 0.33
187,500/12,500 =
15.0
12,500/12,500 = 1.00
25,000/4,000 = 6.25
11,250/7,500 = 1.5
56,250/12,500 = 4.5
112,500/4,000 = 28.1
Engineering Expenses
20,000/7,500 = 2.67
30,000/12,500 = 2.40
50,000/4,000 = 12.50
Shipping Expenses
5,000/7,500 = 0.67
35,000/12,500 = 2.80
110,000/4,000 = 27.50
46.17
58.20
115.35
Total
Valves
Pumps
Flow
Controllers
86.15
107.69
95.38
56
35.00%
70
35.00%
62
35.00%
46.17
46.41%
58.20
45.96%
115.38
-20.96%
86
87
105
56
34.9%
70
19.5%
62
41%
46.17
46.32%
58.20
33.10%
115.38
-9.88%
Margin Calculation
Planned Selling Price
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Table 2 presents with the information about various activities on which we have based the
costing basically the cost pools, drivers of the relevant cost pools and the rate of the costing
which should be taken into account. In order to carry out an activity based costing so that we
can find the relevant costs associated with each product we do the product wise activity based
costing for the individual cost pools shown in Table 3. Exhibit 4 provides us with the data
relating to the monthly production and operating statistics which can be combined with the
costs for each cost pool derived in table 2 to give us the individual product wise activity
based costing. The data obtained from table 3 enables us to arrive at table 4 which calculates
the per unit ABC taking into account the total cost for each activity and the number of units
produced of each product to get the individual product wise per unit costs. The total costs will
be the sum of the direct costs and the ABC. This total cost of each product will enable us to
calculate the margins that each product provides based on the planned as well as the actual
selling prices. The information is provided in table 5 as shown below.
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3.0 RECOMMENDATIONS
Based on the analysis given above, we recommended that Wilkerson Company move
from Volume-based Costing to Activity-based Costing to better analyze the cost figure and
health of the company. It will be 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 can be seen from the analysis of the 2
methods the gross margin returns vary in both 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. We recommend the
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company to review its policy in respect to flow controllers. Wilkerson can work on changing
the prices of individual flow controllers in order to secure a healthy profit margin. One way
to do this is setting prices in accordance with the amount of resources consumed (activitybased pricing) by individual product or customer.
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