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Wilkerson Company Accounting

By:   •  December 8, 2016  •  Coursework  •  863 Words (4 Pages)  •  1,386 Views

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  1. Currently, the direct labor costs are used to assume MOH; therefore, if direct labor increases, so does MOH. Real costs incurred are not reflected by this.
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4.  In order to improve the profitability margin, Wilkerson’s needs to target the flow controllers due to the negative gross margin. As the case stated, they recently raised the price by 10%, which resulted in the demand being unaffected; meaning it is inelastic. Wilkerson’s should continue with this strategy while keeping a close eye on the market to ensure that demand is not affected. If Wilkerson’s continues to raise the price in 5% increments, they will eventually reach their target 69%. However, based off of the ABC model, it might also be in Wilkerson’s favor to consider discontinuing the product. On the other hand, the case also mentions that there is now a demand for different types of flow controllers. Wilkerson could change their strategy to a more customer relationship building method. Producing different types of flow controllers definitely impacts costs, therefore Wilkerson could segment their production in favor of the highest purchasing volume customers.

Improving the profitability margin on the valves will be a completely different process. Wilkerson’s gross margins already surpass the company’s target. Competitors have caught up to Wilkerson’s and are now able to create valves of the same quality. In order to improve the profitability margin, Wilkerson’s should invest profits into R&D in order to put themselves ahead of the game.

In regards to the pumps, Wilkerson’s currently leads the market. They did however have to lower their prices in order to match their competitor’s which resulted in a decrease in their gross margins. Since the pumps are a high commodity product, in order to sustain at the top of the market Wilkerson’s will either need to invest in R&D to create an add-on service or operate on a higher level of volume. Another idea would be to create loyalty programs with key accounts that they have built relationships with. These loyalty programs could involve specific discounts based off of the amount of pumps purchased.

As a company in general, Wilkerson’s should reevaluate their targets so that management can accurately allocate their resources.

5. I have several concerns. First, deciding on an allocation base to use for the set-up hours. I do not think that the current method is sufficient for cost tracking. The components of each product should be considered when estimating these costs. My second concern is the packing and shipping. There is a flat fee of $500 per shipment. I do not think that this is accurate at all since the size of the shipment is not being considered. There is a fixed cost of $500, and it does not differ to ship 10 or 10,000 units. My final concern is the allocation of the selling and administrative expenses. I assumed these to be fixed expenses in order to simplify the costing model. I This decision was made due to lack of information. No information was provided that would help to allocate expenses amongst the three products. If provided with this information, the costing system would be much more accurate because we could then allocate the costs to the pumps, valves, and flow controllers.

In terms of more information, I would have liked to have an order breakdown. Orders should provide a detailed list of all of the materials and number of units in each product. Next, I would like more shipping information. I believe it is important to know if Wilkerson uses third party vendors because tracking and trending this could help limit costs. Finally, customer information would be extremely useful. By keeping track of customer information, the company would be able to manage their accounts more efficiently and gain more loyalty resulting in increased profitability.

  1. According to the case study, the flow controllers had the highest margins (41%). However, when looking at the ABC analysis in depth, it is evident that they actually generate at a gross margin of -9.9%. After examining this information, it is safe to say that the product with the highest margin is the valve (46.3%). The ABC model is much more accurate than the CVP calculations because in the CVP calculations, the difference between direct labor costs and MOH are not considered.

  1. Wilson faces a number of competitive situations. In the external environment, first, their competitors have been reducing the prices on their pumps. Next, competitors continue to overlook the opportunity flow controllers present: large profit potential. Finally, commodity products compete with Wilkerson in both price and volume.

Internally, Wilkerson is suffering from a decrease in their profits due to the prices being lowered on their pumps. Next, since the pumps are the costliest product to produce, it is extremely difficult to increase their profit margins because they receive the lowest margin overall.


Pump

Valve

Flow Controller

CVP

ABC

CVP

ABV

CVP

ABC

DL

75000

75000

156250

156250

40000

40000

DM

120000

120000

250000

250000

880000

80000

MOH

225000

151250

468750

321250

120000

333500

Differences

73,750

147,500

-213,500




Pump

Valve

Flow Controller

CVP

ABC

CVP

ABV

CVP

ABC

DL

10

10

12.5

12.5

10

10

DM

16

16

20

20

22

22

MOH

30

20.17

37.5

25.7

30

83.38

Unit Cost

56

46.17

70

58.2

62

115.38

Gross Margin

34.9%

46.3%

19.5%

33.1%

41%

-9.9%



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