Wilkerson

Q-1 What is the competitive situation faced by Wilkerson?
A-1 Wilkerson manufactures pumps and they used to get 35% margins. However
with the advent of many other players in pump manufacturing the prices have
been dropping significantly and it seems they are earnings pre-tax margins of
around 3% down from 10% operating margins. Every month the prices have
been dropping and pumps being commoditized products with no differentiating
feature Wilkerson had to match the price drops. Thus they face the problem of
falling prices with falling margins.
Q-2 Describe Wilkersons current cost system.
A-2 In the present costing system material cost is allocated based on the price
paid for components based on annual purchasing contracts. Labour costs were
allocated based standard running times and a cost of $25 per hour of labour cost
including fringe benefits. Overhead costs of the departments was charged as
300% of the labour costs. Thus this is how the price for the product was
obtained.
Q-3 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?
A-3 One of the main problems associated with the earlier costing system is that
it allocates overhead on the basis of the direct labour hours which might not be
the true representative of the overhead allocation. Overheads have different
components with different drivers for each as enumerated in the table below.
Activity
Machine related Expense
Setup Labour
Receiving and production
control
Engineering
Packaging and shipping
Driver
Machine Hours
Production Runs
Production Runs
Hours of Engineering
work
Number of shipments
Thus the overheads are allocated as given in the table below:

Costs
Setup labour
control
Engineering
33600
0
40000
18000
0
10000
0
15000
0
Driver
Total
Driver
Cost/Dri
ver
Machine Hours
11200
30
Production Runs
160
250
Production Runs
160
1125
1250
80
300
500
work
Number of
shipments
Thus the table above shows the cost/driver for overheads. The overheads are
calculated for each product below
Valves
Cost Heads
Driver
Cost/Driver

Setup labor
control
Engineering
Machine Hours
Production Runs
Production Runs
30
250
1125
Driver
Product
3750
10
10
work
Number
of
shipments
80
250
20
500
10
50
for
Co
11
25
11
Total Overhead Costs
15
Direct Material Costs = 16 x 7500 = $120,000

Direct labour costs =10 x 7500 = 75000
Total Cost for Valves = $346,250
Operating Profit= 86 x 7500-346250=$298750
Operating Margin = 298750/645000 = 46%
Pumps
Cost Heads
Driver
Cost/Driver

Setup labor
control
Engineering
Machine Hours
Production Runs
Production Runs
30
250
1125
Driver
Product
6250
50
50
work
Number
of
shipments
80
375
30
500
70
35


Direct labour costs =12.50 x 12500 = 156250
Total Cost for Pumps= $727,500
Operating Profit = 87 x 12500-727500 =360,000
Operating Profit margin = 360000/1087500 = 33%
for
Co
18
12
56
32
Flow Controls
Cost Heads
Driver
Cost/Driver

Setup labor
control
Engineering
Machine Hours
Production Runs
Production Runs
30
250
1125
Driver
Product
1200
100
100
work
Number
of
shipments
80
625
50
500
220
11


Direct labour costs =10 x 4000 = 40000
Total Cost for Flow Controls = $461,500
Operating Profit = 105 x 4000 461500 = -$41500
Operating Profit margin = -10%
As can be seen above valves have the highest operating profit margin followed
by pumps earning more than the projected margins. The flow controllers which
were considered highly profitable are making losses at the given price point. The
redistribution of profits happen because of the reallocation of the overheads
based on the drivers giving a closer to reality costs.
Q-5 Based on your analysis in Question 4, what actions might Wilkersons
management team consider to improve the companys profitability?
A-5 Based on the above analysis we can see that flow controllers are making
losses and on a previous increase of price no effect on demand was observed.
This indicates that the demand is fairly inelastic at the present price points and
further price increases are possible. This will help in improving the profitability of
the flow control devices. For pumps Wilkerson should not take price drops till it
affects market share as it will affect the healthy margins they earn right now.
Q-6 What concerns, if any, do you have with the cost estimates you prepared in
the answer to Question 4? What additional information or analysis would you
want for better cost and profitability estimates?
A-6 These cost estimates are based on the drivers being assigned to the
activities. However the drivers used might not be representative of the activities.
for
Co
36
25
11
33
However if more details can be obtained about which activity is driven by what
driver accurately and tying it up with the data from the past will help in
developing a much better model.

Wilkerson

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Wilkerson

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What is the competitive situation faced by Wilkerson?

Describe Wilkerson’s current cost system.

Q-1 What is the competitive situation faced by Wilkerson?

Thus the overheads are allocated as given in the table below:

Machine related Expense

Packaging and shipping

Total Overhead Costs

Direct Material Costs = 16 x 7500 = $120,000

Machine related Expense

Packaging and shipping

Direct Material Costs = 20 x 12500 = $250,000

Machine related Expense

Packaging and shipping

Direct Material Costs = 22 x 4000 = $88,000

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