Variable Cost

The company has been functioning well in terms of generating profit and demand so far. However, there will be a 20% increase in demand for the next month of operations as predicted by management, and the production and supply management's problems may come as a problem they can no longer afford.

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.

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.

The manufacturing manager now feels that the competitors’ valves are of equal quality as that of Wilkerson. Currently, the competitors have not changed their prices and GM has been maintained at 35%.

| Use this information for questions that refer to the World Tennis Ball (WTB) Company case.

Marketing is challenging for Wilkerson because they are no longer holding a competitive advantage in the valve product line, nor are they price leaders in the pump line.

All segments are critical for the implementation of our company’s strategy because we chose to be broad cost leaders. Cost leaders maintain a presence in all market segments by focusing on low production costs and competitive pricing. With that in mind, one segment is considered to be slightly more important than the others: the low end segment. We will compete in every market segment, but this is one of the most important due to the fact that price is the main consideration of the buying criteria at 53% importance. Our costs will be much lower than our competitors which translates into a lower market price for this product, which is ideal for our customers.

Decline in sales since 1998. As company’s flagship brand, Brita was expected to contribute double digit top line growth. But in reality, there was approximately a 5% decline in sales every year since 1998 and this decline continued until 2006.

This diversification approach allows them to enjoy economies of scale and also economies of scope, by offering differentiated products of a similar or even in the same category to answer different customer needs. Operational efficiency logistics to reach nearly 100% first-pass line fill and expanding global presence help the company improve and expand with their customers. The acquisition of brand name products, changing in cost structure to improve operation margins to minimum of 15% and achieving critical mass protecting its shelf space at each category. Many of the retail customers will ask Newell competitors if they ship like Newell, this proves the level of customer service and efficiency that Newell reached and all these results in decrease of cost; however increase in WTP.

All costs can be divided into two basic categories: fixed costs and variable costs. "Fixed costs are costs that are independent of output" and the company cannot alter these costs, no matter what the demand for the product (Variable cost and fixed costs, 2012, Economics Fundamental Finance). "These remain constant throughout the relevant range and are usually considered sunk for the relevant range (not relevant to output decisions). Fixed costs often include rent, buildings, machinery, etc." (Variable cost and fixed costs, 2012, Economics Fundamental Finance). In the case of Apple, such fixed costs might include the costs of subcontracting with manufacturers to make the iPhone 5 as well as the costs to keep Apple's own facilities running while engineers troubleshoot the new product. There is limit to how much a company can alter its fixed costs, although fixed costs usually do not increase dramatically in the short term, either. In the long term, of course, Apple can renegotiate its contract with the companies with whom it outsources; find cheaper places or methods to manufacture the iPhone, etcetera. But the key aspect of fixed costs is that regardless of how many iPhones it chooses to manufacture, Apple cannot alter those costs very much over the course of the initial phases of production.

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:

1. What is the competitive situation faced by Wilkerson? The critical product in term of market competition is the pumps of Wilkerson Company. The pumps are Wilkersons major product line with a production of about 12,500 units per month. Pumps currently have the lowest gross margin among all products, because competitors had been reducing prices on pumps and Wilkerson adopted its prices in order to remain competitive and to maintain the volume. 2. Given some apparent problems with Wilkersons cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Our conclusion is, that they should not adopt

Strategies of our firm In oligopoly market, one important method to increase the market share is to keep the price lower than competitors price. However, because at the beginning of the game, our firm ignored the importance of the plant size, process improvement and the training, our production cost was higher than other firms. So we could not use the

The major problem faced by Destin is that pumps are losing profits due to intense price competition. Destin was forced to match the continuously reduced price from its competitors despite of the high production costs. As a result, the gross margins in the latest month have fallen from 35% to 22%. The reason why the company has been stuck in such difficulty, as Peggy pointed out in the meeting, is primarily because its competitors might be using a revised costing system while Destin is still using the traditional one.

|Course Code |MBA 625 |Course Name |Corporate Finance | |Date | |Due date |Week 4 | |Maximum Marks |100 |Weight |20% | |Learning Outcomes |LO1, LO2 ,LO3,LO4,LO5 | |Student Name | |