Overview
Analyze the case and address the following questions (Case submissions are graded based on effort)
- What is the competitive situation faced by Wilkerson?
- What is the structure of the existing (traditional) costing system? Evaluate the features of this system. Should Wilkerson abandon its overhead cost allocation system and make managerial decisions based on contribution margin (price less variable costs); thereby in effect using marginal costs rather than average costs? Note: only direct materials and direct labor costs are assumed to be variable here.
- Compute revised product costs based on an ABC (activity-‐based costing) analysis. Interpret your findings regarding the profitability of the different products
- Should Wilkerson worry about whether they are at or below full capacity when computing the OH rates? For example, March was a “typical month”, but at other times last year the demand was higher (machine hours = 12,000 vs. 11,200; 180 runs vs. 160; and 400 shipments vs. 300). Discuss verbally the issues involved.
- Ignore the information given in 4. Suppose Wilkerson begins the month of March with zero inventory. Over the course of the month, they sell the entire output of valves and flow controllers, but only half of the pumps they are producing. What will be the difference in operating income for the month of March between the two costing methods—traditional (in 2.) versus ABC (in 3.)? Assume that Packing and Shipping costs are proportional to the number of shipments, and that the number of shipments for pumps gets halved—hence 50% of those costs can be avoided. (Hint: think back to your financial accounting class: what costs items are “inventoriable”?)
Important remarks:
Note that the total number of production runs for each product is given in Exhibit 4.
- No need to multiply this number with the number of components, which is what one might read into bullet #2 on page 2 of the case.
- Also on page 2 of the case (second paragraph) it says that flow controllers required more labor than the other products. That’s obviously not true, as Exhibit 3 shows.