Wilkerson Company
http://www.scribd.com/nikunjj_1/d/70869811-Solution-to-Wilkerson Management Accounting for Multinational Companies
Solution to the Wilkerson Case
Igor Baranov
Executive Summary
Taking into account the difference among product and high proportion of overheads, Wilkersonshould abandon its existing cost system and move to activity-based costing. The profitability analysisindicates that the company earns healthy margins on pumps and valves. However, the margin of flow controllers at actual usage of capacity is negative. Wilkerson should consider action targeted atcost reduction (changes in flow controllers design or in their production and delivery process) orraising the price of flow controllers for customers. Since flow controllers are customized, thecompany can set different prices for different customers (groups of customers) based on the actualamount of resources spent (e.g. implement activity-based pricing).
Problem
Wilkerson has to estimate the profitability of its products in order to make long-term product mixdecisions. These decisions should be based on estimation of product costs and might includedecisions to continue / stop production of a particular product, pricing decisions, and decisionsconcerning product and process design, including customer relations.
Information
Information about direct labor and material costs as well as overhead costs is available. Overheadsare recorded by five cost pools (machining, setup labor, receiving and production control,engineering, and packaging and shipment). We assume that the current month is typical in terms of (a) capacity utilization, and (b) cost of resources.
Analysis
Competitive situation
The competitive situation varies for Wilkerson’s products. Pump and flow controllers are on theopposite sides of the spectrum. Pumps are commodity products, produced in high volumes for amarket with severe price competition. Flow controllers, on the contrary, are customized products,sold in a less
Solution to the Wilkerson Case
Igor Baranov
Executive Summary
Taking into account the difference among product and high proportion of overheads, Wilkersonshould abandon its existing cost system and move to activity-based costing. The profitability analysisindicates that the company earns healthy margins on pumps and valves. However, the margin of flow controllers at actual usage of capacity is negative. Wilkerson should consider action targeted atcost reduction (changes in flow controllers design or in their production and delivery process) orraising the price of flow controllers for customers. Since flow controllers are customized, thecompany can set different prices for different customers (groups of customers) based on the actualamount of resources spent (e.g. implement activity-based pricing).
Problem
Wilkerson has to estimate the profitability of its products in order to make long-term product mixdecisions. These decisions should be based on estimation of product costs and might includedecisions to continue / stop production of a particular product, pricing decisions, and decisionsconcerning product and process design, including customer relations.
Information
Information about direct labor and material costs as well as overhead costs is available. Overheadsare recorded by five cost pools (machining, setup labor, receiving and production control,engineering, and packaging and shipment). We assume that the current month is typical in terms of (a) capacity utilization, and (b) cost of resources.
Analysis
Competitive situation
The competitive situation varies for Wilkerson’s products. Pump and flow controllers are on theopposite sides of the spectrum. Pumps are commodity products, produced in high volumes for amarket with severe price competition. Flow controllers, on the contrary, are customized products,sold in a less