Fluctuation Analysis: The Wilkerson Company

• Net profit margin has been negative and no major patterns over the 9 year period on net profit since the trend of the industry is based mostly on economic factors, and whether or not they secure contracts. Due to high percentage of COGS they are only left with a net profit of $980 or

The purpose of this report is discussing the case of Wilkerson Company that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%. After observing the existing costing allocation, we found out there is an issue on the existing costing report that the manager could not be able to see the real situation. In light of this, there will be brought to the discussion on the feasibility of using an alternative costing method – Activity based costing (ABC) in the latter paragraphs.

Although the company did show an increased gross profit of $8,255,000 with $6,358,000 less Net Sales in 2013 versus 2012, that increase is due to the reduction in product Cost of Goods Sold by $14,613,000. Since increases in product price will negatively affect sales, one of management’s primary goals is to keep prices stable. This objective is achieved through implementation of cost cutting programs, investing in more efficient equipment, and automation of more steps in the production process.

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?

11. Utilities and services standard output $150,000, actual output is $$218,000. This is a favorable variance of -$1777. This variance is due to reduce sales, less power at the plant is needed because less units are being made. 12. Research and Development standard output is $85,861, actual output is $82,841. This is a favorable variance of -$3,020. This variance is due to cut backs in R&D because of slow sales and low demand for new bikes. 13. Other General and Admin Expenses standard output $170,000, actual output is $172,000. This is an unfavorable variance of $2000. This increase is due to addition materials needed for advertising. 14. Other utilities and

3. Market research estimates that monthly equipment production could be increased to 3,500 units which is well within production capacity limitations, if the price were cut from $1,580 to $1,400 per unit. Assuming the cost behavior patterns implied by the data in Exhibit 1 are correct, would you recommend that this action be taken? What would be the impact on monthly sales, costs, and income?

Wilkerson employs a Normal Cost System, which means that they use predetermined overhead rates along with actual costs for direct material and direct labor. Normal costing systems are appropriate when overhead costs are a relatively small percentage of total manufacturing costs and product diversity is limited. For Wilkerson, normal costing does not make sense. Overhead costs make up over 50 percent of total manufacturing costs and their product offering is relatively more diverse. This indicates that the current accounting system in place may be distorting costs significantly. Supporting data:

Alex comes up with the consensus that the “Goal” of his business and many others is to increase net profit while simultaneously increasing return on investment and their cash flow at the plant. This basically means to make money. These three measurements can be achieved by looking closer into his second set of measurements. Alex specifically must find a way to increase throughput while at the same time decreasing it inventory and operational expenses. All three of these measurements must be cautiously monitored since they all rely on each other to be obtained in balance. Factors that cause throughput, inventory, and operational expenses to become unbalanced are excess manpower and balance capacity of the demand of resources in the market.

In the case of Mendel Paper Company which produces four basic paper products lines at one of its plants: computer paper, napkins, place mats, and poster board. Although the plant superintendent, Marlene Herbert is pleases with increased sales he is also concerned about the costs. The superintendent is concerned with the high fixed cost of production, the increases in fixed overhead and even variable overhead. He feels that the production of place mat should be discontinued. His reason for the discontinuation is that the special printing is driving up the variable overhead to the point where the company may not find it profitable to continue with the line. After reviewing the future predictions of the

Jonah tells them that they have hidden capacity because some of their thinking is incorrect. Some ways to increase capacity at the bottlenecks are not to have any down time within the bottlenecks, make sure they are only working on quality products so not to waste time, and relieve the workload by farming some work out to vendors. Jonah wants to know how much it cost when the bottlenecks (X and heat treat) machines are down. Lou says $32 per hour for the X machine and $21 per hour for heat treat. How much when the whole

Andres was forced to import product from French division as he ran out of capacity several times due to new machines performing inadequately. This added an overhead expense of approximately 2147 (Additional maintenance costs + Transfer costs)

Option A2: The financial gain from this scheme is equal to just about 0.5% (See Exhibit 2) of the profits. This gain isn't worth the resistance of the executives. So offer them other benefits/incentives (Ex: Higher annual salary hike) to make up for the benefit they will loose. This will make both the sales people and the executives happy.

Appendix B clearly shows, that from a sales representative’s point of view it does not pay to build a team. Assuming that a successful sales representative, who is in the company for about 2 years (meaning that his own sales are still on the rise of 20% annually and not declining, because he is shorter than 5 years in the company), acquires one sales representative in his circle of friends, it can be seen that already in their first month, let alone year together, it diminishes the sales of the leader. The more members he accepts in his team, the greater are his losses from his own revenue and hence, his profit. This is

With all these changes, the company will obtain more profit with the level production, $532,000 instead of $351,000,which represents an important increase.

Manufacturing companies almost always incur variable expenses. A big reason why is because to make products, you need raw materials. In this case we have Fly Ash (250,000), Gypsum (250,000), Lime (300,000) and Sand (40,000). Another variable expense will be Workers Labor (100,000) and Drivers (25,000). The workers will be working varying hours depending upon the production need. During busy times they might be working overtime, while in down times they could very well be asked to not come in for a day. This is all under the assumption that they are paid hourly and not on salary. If they were salaried it would be considered a fixed cost. The same goes with the drivers. They will be delivering the products on a demand basis. More trips when the company is busy and less when production is slow.