Wilkerson Company: Case Analysis

Submitted by:
Group 12
Akanksha Kumari (P22003)
Shaswat (P22056)
Muskan Gupta (P22041)
Ashish Karush (P22009)
Kousik Biswas (P22036)
Based on your case analysis, answer the following questions:

1. How do you interpret the break-even point for Wilkerson company for multi-products
(BEP calculations provided in the excel for reference)?
Ans: As per the calculations, the Break-Even point for Wilkerson company for multi-
products is 23,028.7 units, and the sales we currently have is 24,000 units. This indicates
that we have a very low margin of safety, i.e. 971.3 units. Although it’s earning profits,
the company works in a risky environment.

2. What does the ABC product cost and profit calculations reveal?
Ans: ABC product cost and profit calculations are:

Selling Price $86.00 $87.00 $105.00

       
Direct labor Cost $10.00 $12.50 $10.00
Direct Material cost 16.00 20.00 22.00
Overhead cost 20.167 25.7 83.375
       
Profit/Loss $39.83 $28.80 ($10.38)
Profit/Loss Margin 46.32% 33.10% -9.88%

Traditional cost and profit calculation is:

Valves Pumps Flow Controllers

Direct labor cost $10.00 $12.50 $10.00
Direct material cost 16.00 20.00 22.00
Manufacturing overhead (@300%) 30.00 37.50 30.00
Standard unit costs $56.00 $70.00 $62.00

Target selling price $86.15 $107.69 $95.38

Planned gross margin (%) 35% 35% 35%

Actual selling price $86.00 $87.00 $105.00

Actual gross margin (%) 34.90% 19.50% 41.00%

It reveals that, according to ABC calculations, the profit per unit is highest for the
valves, then for pumps, and that the flow controllers are causing a loss. Pumps
contributed the least to the profit in the traditional process, whereas flow controllers
generated the most profit per unit.
3. Given some of the apparent problems with Wilkerson’s cost system, should
executives abandon overhead assignment to products entirely by adopting a
contribution margin approach in which manufacturing overhead is treated as period
expense (specific to a period)? Why or why not?
Ans: Yes, the executives should abandon overhead assignment to products entirely by
adopting a contribution margin approach in which manufacturing overhead is treated as a
period expense because the overhead costs can’t be directly associated with the product,
and to get a more accurate picture, we can allocate costs basis the activities. Period costs
do not relate directly to the production, and in our case, the period will be one month, i.e.
March. Activity-based costing will help the company to strategize its pricing more
accurately and will also help us to know which overhead product cost can be refactored.
Contribution margin technique will also help in determining the variable cost of each of
the three products separately.

4. Why have the cost shifts occurred?

Ans: The cost shifts have occurred because of allocating three major overhead costs:
receiving and production control, engineering, packaging and shipping costs. Receiving
and production control cost is now 63%, engineering costs are 50%, and packaging and
shipping costs are 73% which are now charged to cost of flow controllers based on ABC
costing method. Also, there have been fewer shipments of flow controllers (only 300),
and because shipping is more expensive ($150000), the cost driver rate has increased to
$500 per unit. Additionally, the receiving and product cost per unit for flow controllers is
quite high ($27.50) since the expense of receiving and packing is $180000, and there are
only 160 units in total, leading to an increased driver rate of $1125.

5. Based on ABC analysis, what actions might Wilkerson’s management team consider
to improve the company’s profitability?
Ans: Basis our ABC analysis, after comparing it with the Product Profitability Analysis,
we can see for valves profit margin was 34.9%, for pumps was 19.5% and for flow
controllers was 41%. But in actuality, the profit margin for valves is 46.3%, for pumps is
33.1%, and for flow controllers, there is a loss of 9.8%. Wilkerson’s management team
should consider stopping producing flow controllers and should focus more on valves and
pumps. Or else the company can also increase the selling price of the flow controller by
more than $115.38. Also, they should focus on measures to increase their sales of valves
and pumps to increase the margin of safety.