Management Accounting for Multinational Companies
Solution to the Wilkerson Case
Taking into account the difference among product and high proportion of overheads, Wilkerson should abandon its existing cost system and move to activity-based costing. The profitability analysis indicates that the company earns healthy margins on pumps and valves. However, the margin of flow controllers at actual usage of capacity is negative. Wilkerson should consider action targeted at cost reduction (changes in flow controllers design or in their production and delivery process) or raising the price of flow controllers for customers. Since flow controllers are customized, the company can set different prices for different customers (groups of customers) based on the actual amount of resources spent (e.g. implement activity-based pricing).
Wilkerson has to estimate the profitability of its products in order to make long-term product mix decisions. These decisions should be based on estimation of product costs and might include decisions to continue / stop production of a particular product, pricing decisions, and decisions concerning product and process design, including customer relations.
Information about direct labor and material costs as well as overhead costs is available. Overheads are recorded by five cost pools (machining, setup labor, receiving and production control, engineering, and packaging and shipment). We assume that the current month is typical in terms of (a) capacity utilization, and (b) cost of resources.
The competitive situation varies for Wilkerson’s products. Pump and flow controllers are on the opposite sides of the spectrum. Pumps are commodity products, produced in high volumes for a market with severe price competition. Flow controllers, on the contrary, are customized products, sold in a less competitive market with inelastic demand at the current price range....