Wilkerson Company Case Essay Example for Free

Wilkerson Company Case Essay1. The Wilkerson Company is in the business of manufacturing valves, affectionatenesss and precipitate controllers. The company has been experiencing mesh losses due to price reductions as a result of heavy competition in the pump category, which is considered a commodity crossroad. In the valves category, Wilkerson seems to be a market leader with a loyal customer base. The valve business is less competitive, with no price reductions, and therefore the company has maintained its gross margin taper speckle not compromising market sh ar. Similarly to the valve business, the flow controller category is not as competitive as the pump industry, hence Wilkersons ability to increase price by 10% without sacrificing volume. In addition, the company needs to take into consideration its increase in indirect depreciates relatively to the direct fag out expenses. All in all, the company has seen its pre-tax margin drop from 10% to 3%.2. Adopting a perio dic expense approach will severe the already current problems with Wilkersons greet system by distorting even to a greater extent the actual speak to picture. The reason is that the periodic method would ignore the companys harvest-time swagger as distributively of the 3 categories has a differentiated direct speak to structure. This would therefore create an even more inconclusive analysis of the companys net profit structure. Although the current damage allocating system is not optimal (as will be discussed later), it is lull preferable over the periodic system, which does not take into account any overhead costs when analyzing product margins and the margins effect on the overall profit.3. Today, Wilkerson uses a simple cost accounting system which charges apiece whole of product for direct material and labor cost. Material cost is found on the component price, while labor rates are charged to products based on the production fail times of each product. Then, the ove rhead costs are allocated to each of the 3 products as a percentage of production run direct labor costs (currently 300%). 4. Table 1 Activity Based Costs Drivers and rateTable 2 Calculations of product margins based on current methodTable 3 Calculations of product margins using proposed Activity Based CostingThe shifts in costs and profitability seen above are set by all the factors that are not taken into account in the current cost apportionment system production runs, subject of shipments and hours of engineering work. We intrust that these factors are optimal for estimating the cost per product. For example, if we look at the flow controllers, we hatful see that they leave the least machine hours but the highest values of all cost drivers mentioned above. This dramatic difference distorts the cost analysis and favors the flow controllers on the account of the valves and especially the pumps.5. There are number of options to improve the companys profitability* lean Contro ller Price Increase As described in the case, Wilkerson has recently raised flow controller prices by 10% without effect on volume. This leads us to believe that it would be possible to further increase prices in order to improve the products losing gross margin (-10%).* Flow Controller Cost Reduction In addition to a possible price increase, Wilkerson must see a way to lower costs. This may be done by lowering the number of shipments (cost driver) to customers. agree to the current agreements with customers, products are packaged and shipped for just-in-time delivery. This method substantially increases the number of shipments and packaging related expenses. This change can be successfully carried out by offering customers volume related discounts in order to decrease the total number of shipments by increasing the size of each shipment. The rationale behind this recommendation is that the cost driver is the number of shipments, rather than the size of each shipment.* Company Pro duct Mix Based on our profitability calculations for each category, Wilkerson can improve its total profit and profitability by changing its mix to favor valves rather than pumps. Moreover, there is room to consider reducing or even stopping the manufacturing of flow controllers.6. Our concern regarding our cost estimates used in the previous sections is that the data in exhibits 1, 2, 4, used for all calculations, is based on a single month and does not necessarily reflect a typical month. A more accurate way to estimate cost would be to rely on a long-acting period of time (perhaps annual). In order to improve our cost and profitability estimates it would be helpful to have information regarding GA, Selling and Marketing cost drivers so we could allocate them directly to each product cost as well. Lastly, we assumed it possible to further increase flow controller prices without affecting the sales volume. It would be helpful to have more data regarding changes in prices and effe ct on their sales volume.7. A number of changes may be made to the current compensation method in order to improve profit* Higher compensation for sales of high profit margin products in order to improve sales mix as mentioned above. * Relative compensation to quantity of sale. This will also promote the goal of cost reduction as it will decrease the number of shipments.