Wilkerson Case Study
The competitive situation currently faced by Wilkerson is that their competitors had been reducing the prices on pumps which is the major product line of Wilkerson. The price cut in pumps has dropped the pre-tax margin to less than 3% which is far below their historical margins of 10%.
Wilkerson’s existing cost system operates under a simple cost accounting system where each unit of product was charged for direct material and labor cost. The cost of materials was based on the prices paid for components under annual purchasing agreements and the labor rates were $25 per hour. Wilkerson has only one producing department, in which components are both machined and assembled into finished products. The overhead costs are allocated to products as a percentage of production-run direct labor cost at a rate of 300%.
Valves
Pumps
Flow Controllers
Direct Labor
$10.00
$12.50
$10.00
Direct Material
16.00
20.00
22.00
Manufacturing Overhead
20.17
25.70
83.39
Standard Unit Costs
46.17
58.20
115.38
Target selling price
86.15
107.69
95.38
Planned gross margin