Wilkerson Case: Chaitali Gala (0122/50)

Assignment Questions
1. Out of the product line of vaults, flow controllers and pumps , Wilkerson is
facing stiff price wars in the Pump segment. Its competitors having been
continuously reducing the price which have to be matched by Wilkerson
leading to reduction in the gross margin to about 20%. In the flow
controllers segment, there have been no strong competitors and no change in
the market share with increase in price. There has been no major player
competing with the vault produced by Wilkersons.

2. The major problem with their existent approach is that the cost driver of
production run- direct labor cost, used to assign the manufacturing overhead,
varies with each product. The gross margin from this approach will not show
the true value of gross margin. Also, some workers work on different
machines simultaneously, which again affects the correct value of GM.

The executive should not use the second method of treating manufacturing
overheads as period expense. This method is not appropriate for not
customized batch level production goods.

3. The method used by Wilkerson presently is job-costing system where

overhead rate is used to allocate the applied manufacturing cost.

4. Based on the activity based costing model, the overheads are allocated on
the basis of the activity it is associated with. Due to this, the overhead cost
per unit of flow controllers increases as compared to the earlier costing used.
 At the same time that increased cost reduces the overhead unit cost of the
other products.
 
  O Machinery   Machine  
  v expenditure   Hours   Valves  
  e
  r Setup  Labour  
  h
  e Receiving  &   Production  
  a production   runs   Pumps  
  d   control  
  C
  o Packaging  and   No.  Of  
  s   Production   Shipments  
t   Flow  
s   Engineering   Engineering   Controllers  
hours  

(All  costs  distributed  in  

ratio  of  individual  costs)  

5. The best option Wilkerson will be to further increase the price of the flow
controllers. This will provide them with increased profitability as there is no
strong competition against them

6. The profitability might not be correct as the assumption used here is that all
the goods are sold. Also the allocations of the setup and control cost are
based on the cost drivers. So additional info on these drivers will be helpful

7. Instead of commissions being based on gross sales, they should compensate

him by considering the net sales. This will reduce the discounts given by
sales people just to increase incentives.