Todd Schueler
Week 2 Assignment 1:
Wilkerson Company Case Analysis Questions 3, 4, and 6
Saturday, April 05, 2014
3.) The estimated product costs for valves, pumps, and flow controllers using ABC for overhead activities (primarily Ex. 1 & 4) and direct cost data from the Exhibits are: * The Valves total product variable costs are $195,000, the Valves total fixed costs are $149,990.31 and the Activity Based Costing Valve cost per unit it $46. * The Pumps total product variable costs are $406,250, the Pumps total fixed costs are $316,501.94 and the Activity Based Costing Pumps cost per unit it $58. * The Flow Controllers total product variable costs are $128,000, the Flow Controllers total fixed costs are
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In using ABC overhead costs are distributed differently across the three products, but in total they are the same, in total. However, ABC changes the information that managers receive to make effective business decisions, which will ultimately result in improved business results.
6.) The Wilkerson Company original case is not effective and accurate without including an ABC analysis. ABC allowed us to assess the business performance of each of its businesses including: Valves, Pumps and Flow Controllers. This enabled us to realize that the Flow Controllers business is not profitable with a Gross Margin of -11.31%. I recommend specifically solving the problem of pre-tax margin going from 10% to less than 3%. The strategic decisions that need to be made are improving the unprofitable Flow Controllers business unit, while simultaneously increasing the sales of the more profitable Valves and Pumps business units. I would capitalize on the highest margin business of the Valves. Specifically, I would develop marketing strategies on how to grow market share in this business. I would assess what we are doing in this business and I would reapply it to our other businesses. This would include evaluating and eliminating costs in the other business units,
1- The total unit cost = Total Variable Cost + Production Fixed Expenses + Advertising Expense + Selling and Administrative Expense = 3.23 + 1.20 + 0.30 + 0.19 = 4.92.
In using the ABC system, Valves and Pumps are matching the company’s target of 35% of gross margin apart from Flow Controllers. With the use of TAC, the gross margin on pump sales is 19.5% that well below the company's target gross margin of 35%. This indicates that the current overhead cost allocation practice did not reflect the real costs incurred on the products. The lower actual gross profit obtained was mainly due to wrong cost allocation on the pump product.
Under the mathematical exhibits Table 4 shows the differences between the old gross margin and the new gross margin. Therefore, this method should look more attractive to the company as well as providing more of an accurate gross margin for them. This showed that the valves and pumps are more useful and profitable than they previously thought whenever they were using the old traditional method instead of the activity based cost method. But, looking at the similarities of them both the pumps is still below the planned gross margin of 35%. The Wilkerson Company wants their gross margin to be above 35% but even using the activity cost based method it is only at 33.1%. A difference was that the old method had flow controllers being the most profitable
2. What is the total cost? How much of the total cost are labor costs? Capital costs?
Develop and diagram an activity based cost model using the information in the case. Provide your best estimates about the cost and profitability of Wilkerson’s three product lines. What difference does your cost assignment have on reported product costs and profitability? What causes any shifts in cost and profitability?
The product cost per unit under absorption costing is $15.00 and under variable costing are 10.60.
Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are
If we compare the old job costing method with the Activity based costing method we can see in the table below that the activity base rate gives us a much more accurate insight in allocating the manufacturing overhead costs. In fact, the activity based overhead calculation shows us that the activity rates for Valves and Pumps are lower than the rates used in plantwide production rates, but the activity based rate for Flow Controllers is around 50% higher than the cost calculated in the job costing method. The reason for this difference in our opinion can be traced back to the high receiving and production control costs as well as packaging &
If product 103 is terminated, there will be a greater loss since Superior has to continue to pay fixed costs. Fixed costs include Rent, Property Tax, Property Insurance, Indirect Labor, Light & Heat, Building Service, Selling Expense, SGA, Depreciation, Interest and Other Income. Loss of
Furthermore, Heavey Pumps would need to evaluate the costs associated with this contract (i.e. labor, production, warehousing, purchasing, transportation, etc.) to determine a new unit price for the bilge pumps associated with CJ Industries contract.
Our new activity-based-costing system reveals serious product cost distortions stemming from our old costing system. The new costing system shows that the standard model costs only $96.82, which implies a target price of $106.50. This price is lower than our current actual selling price and consistent with the price our competitors are charging.
Currently, Orion produces the valve at a cost of $8,000 per unit and sells each unit for $10,000; resulting in a 25% mark-up. Orion has agreed to sell the modestly improved valve for $12,000 per unit when the variable costs alone are $10,500; $8000 per-unit manufacturing costs and $2,500 per-unit comprehensive test procedure costs. Orion has decreased its profit margin to 14% without even considering fixed costs. If the short-cut approach works, fixed costs would be $200,000, and Orion needs to sell 133.33 units to breakeven. If the software design takes eight months, fixed cost could be as high as $440,000 and Orion would need to sell 293.33 units to breakeven. However, with a dramatically improved valve and fixed costs of $200,000 Orion will breakeven after selling 20 units and with fixed costs of $440,000, Orion will breakeven at 46.3 units.
Type, quantity, and Type, quantity, and total cost of material total cost of material charged to job A-143. charged to job A-143. Authorized
Since the manufacturing costs are already considered sunk costs, the remaining costs that will be incurred are the variable marketing costs because it was indicated that the 200 units will be sold through