Q#1.What is the competitive situation curently being faced by the company? The company facing the different competitive situations between the products, gross margin of values are maintained at 35% and produce in standered. Flow controlers are custmized products, and less competitive market power. Pumps are comodity products produced in high voulume at high price for a market. 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. Pumps are commodity products, produced in high volumes for a market with high price competition - price cutting by competitors led to a drop of Wilkerson’s pre-tax margin to under 3%, gross margin on sales for pump sales has fallen below 20%. Flow controllers are customized products, sold in a less competitive market with inelastic demand at the current price range. Valves are standard, produced and shipped in large lots - gross margins have been maintained at 35%. Wilkerson is a quality leader, but this leadership may soon be contested by several competitors. Although they are able to match Wilkerson's quality, there are no signs of price competition yet. Nevertheless, in the long-run Wilkerson should be prepared to compete on price. The price competition pushes Wilkerson to analyze its overhead costs, since no reserves of cost cutting are left in its supply chain (both customer and suppliers agreed to just-in-time delivery). Q#2.what is the problum the company is having allovation of overheads? Should it considered abadoning overheads allocations and shift to direct cost or conribution margin approch. In the current pricing method the wilkerson facing the prbolum that the real manufacturing cost is not actual manufacturing cost, because the proportion of over head cost is large which is at aproximately 52%. In the current method the overheads addociated whith product line regardless of the amount of per unit produce and overhead cost are co-related whith labour cost. The product cost and profitability will be measured without overhead cost means, there is a co-relation between the variable cost to the product price. Th overhead cost of flow controler having more weight just because of there material pric is higher. 3. How does wilkerson’s current cost system works? Develop a diagram to show how cost flow from factory expense to accounts to products. Wilkerson's existing cost system of is the traditional volume-based costing: Direct materials and labor costs are based on standard prices of materials and labor rates. In addition, the manufacturing overhead is also considered as cost and it is allocated in proportion to direct labor cost at the rate of 300% (Based on the assumption that there’s a direct relationship between volume of production of individual products and level of overhead).
# of Units
Total Direct Costs
Overhead Costs (300% of DL)
Total Cost Allocation
4. What are the problums of current costing system? What is the solution of the problum. As overhead costs are not in proportion with the volume of production output the cost system Wilkerson is using at the moment is an inappropriate method that leads to wrong assumptions when analyzing profitability and therefore leads to wrong pricing decisions and ineffective cost management. Activity based costing helps to find the real relationship between the volume of production of a product and the overhead. In a first step it is necessary to define cost pools and find the drivers of those costs. In Wilkerson’s case the different pools would be machine related...
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