Wilkerson

In: Business and Management

Submitted By prashanthembrom
Words 298
Pages 2
Case write-up: Cost Management
Wilkerson Company

The problem – Current method of volume based costing
Wilkerson Company is engaged in the manufacturing of valves, pumps and flow controllers. Its major problem is the very low pre-tax operating income of 3%. This problem can be majorly attributed to the pricing policy which the company follows. Because of the pricing policy, the company is able to earn fairly good margins on valves and flow controllers but is lagging way behind the target in the margin earned from the pumps.
Margin Calculation Valves Pumps Flow Controllers
Planned Selling Price $86.15 $107.69 $95.38
Actual Selling Price $86 $87 $105
Per unit volume based costing $56 $70 $62
Margin (with planned S.P.) 35.0% 35.0% 35.0%
Margin (with actual S.P.) 34.9% 19.5% 41.0%

Solution – Abandon volume based costing and shift to activity based costing
Since the three products viz. valves, pumps and flow controllers differ in their consumer segments, they can be priced based on their specific characteristics. Further we see that the machine related expenses exceptionally high and pumps are used for a major chunk of total machine hours. A low priced pump is thus eating away the profits being earned by valves and flow controllers. The company should shift to activity based costing so as to properly divide the activity-related costs in a proper way. The activity based costing will divide major expenses in a more justified manner and hence will present a clear picture of what is the price band the products can be put. The pumps as we can see is in a very price sensitive market so the company can also seek alternative ways of reducing total manufacturing costs of pumps by adopting newer…...

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