Wilkerson Case Study Analysis Essay example

The purpose of this report is discussing the case of Wilkerson Company that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%. After observing the existing costing allocation, we found out there is an issue on the existing costing report that the manager could not be able to see the real situation. In light of this, there will be brought to the discussion on the feasibility of using an alternative costing method – Activity based costing (ABC) in the latter paragraphs.

Marketing is challenging for Wilkerson because they are no longer holding a competitive advantage in the valve product line, nor are they price leaders in the pump line.

This diversification approach allows them to enjoy economies of scale and also economies of scope, by offering differentiated products of a similar or even in the same category to answer different customer needs. Operational efficiency logistics to reach nearly 100% first-pass line fill and expanding global presence help the company improve and expand with their customers. The acquisition of brand name products, changing in cost structure to improve operation margins to minimum of 15% and achieving critical mass protecting its shelf space at each category. Many of the retail customers will ask Newell competitors if they ship like Newell, this proves the level of customer service and efficiency that Newell reached and all these results in decrease of cost; however increase in WTP.

Wilkerson is a quality leader although his competitor also have a best match with him. Butt there is no competition in price facing by wilkerson, and there is no chances in future. So wilkerson should compete in price by analyze its overhead cost.

6.) The Wilkerson Company original case is not effective and accurate without including an ABC analysis. ABC allowed us to assess the business performance of each of its businesses including: Valves, Pumps and Flow Controllers. This enabled us to realize that the Flow Controllers business is not profitable with a Gross Margin of -11.31%. I recommend specifically solving the problem of pre-tax margin going from 10% to less than 3%. The strategic decisions that need to be made are improving the unprofitable Flow Controllers business unit, while simultaneously increasing the sales of the more profitable Valves and Pumps business units. I would capitalize on the highest margin business of the Valves. Specifically, I would develop marketing strategies on how to grow market share in this business. I would assess what we are doing in this business and I would reapply it to our other businesses. This would include evaluating and eliminating costs in the other business units,

1. What is the competitive situation faced by Wilkerson? The critical product in term of market competition is the pumps of Wilkerson Company. The pumps are Wilkersons major product line with a production of about 12,500 units per month. Pumps currently have the lowest gross margin among all products, because competitors had been reducing prices on pumps and Wilkerson adopted its prices in order to remain competitive and to maintain the volume. 2. Given some apparent problems with Wilkersons cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Our conclusion is, that they should not adopt

The decline in our profits has become intolerable. The severe price cutting in pumps has dropped our pre-tax margin to less than 3%, far below our historical 10% margins. Fortunately, our competitors are overlooking the opportunities for profit in flow controllers. Our recent 10% price increase in that line has been implemented without losing any business. Robert Parker, president of the Wilkerson Company, was discussing operating results in the latest month with Peggy Knight, his controller, and John Scott, his manufacturing manager. The meeting among the three was taking place in an atmosphere tinged with apprehension because competitors had been reducing prices on pumps,

the difficult decision to shut down the product lines and customer divisions that cater to these

For service organizations, activity-based cost systems clarify appropriate cost assignments to products and customers and help to identify the profitability of various products and customers.

RMHC should reduce price immediately in order to tighten the relationship with customers to avoid risk of customers being taken away by UFA. However, this strategy is only a short-term plan because the gross margins are very low that could not withstand significant price cut. Since there are other strong competitors in the market, RMHC does not have the power to monopolize the market and to set the price level.

Since this situation appeared to be a little unusual, William Kenton, manager of the Northern Division, discussed the wide discrepancy of bids with Byrch’s commercial vice president. He told the vice president, “We sell in a very competitive market, where higher cost cannot be passed on. How can we be expected to show a decent profit and return on investment if we have to buy our supplies at more than 10% over the going market.

The key issue presented in front of the management is the possible steps to be taken by the management in order to avoid such losses. Critical Thought The issue addressed by the accounting system of Dakota office products invites our attention to the premise of Activity Based costing methodology. We are certain about the fact that the accounting and reporting system at Dakota Office Product is inappropriate and is leading to the company making wrong decision ultimately leading to losses. This was apparent from the record where the company was able to increase its sales without a corresponding increase in the profits for that particular year. Activity based costing system is an approach which seeks to allocate the overhead cost to the products on a scientific and realistic basis. The existing system of allocating cost at Dakota Office products were inadequate in so much so that it was following an unreasonable basis for allocating the cost, which were known and visible, such as the desktop delivery cost. The existing system was suffering from oversight of some of the expenses. ABC costing system seeks to overcome the problem of oversight and make a more reasonable allocation of the costs. The distinctive feature of this method is the fact that the method can provide useful insights to the management as to the activities which are leading to the cost by

In activity-based costing (ABC), nonmanufacturing as well as manufacturing costs may be assigned to products (on a cause-and-effect basis). Further, some manufacturing costs may be excluded from product costs. An ABC system uses a number of overhead cost pools, each of which is allocated to products and other defined cost objects using its own unique measure of activity. In contrast to traditional absorption costing which is used mostly for external financial reporting, activity-based costing is particularly useful for internal and strategic decision-making.

Our new activity-based-costing system reveals serious product cost distortions stemming from our old costing system. The new costing system shows that the standard model costs only $96.82, which implies a target price of $106.50. This price is lower than our current actual selling price and consistent with the price our competitors are charging.

Activity-Based Costing system will be looked at first. This system, “Refines a costing system by identifying individual activities as the fundamental cost objects” (Horngren., Datar, & Rajan, 2015, pp. 158). Where an activity can be described as, “An event, task, or unit of work with a specific purpose” (pp. 158). In MDE’s case, the different materials being used all serve a specific purpose when it comes to the final product. Whereas process costing is when, “The unit cost of a production or service is obtained by assigning total costs to many identical or similar units of output” (Horngren., Datar, & Rajan, 2015, pp. 665). To better illustrate what process costing is, “Unit costs are calculated by dividing total costs incurred by the number of units of output from the production process” (Horngren., Datar, & Rajan, 2015, pp. 665).