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Wilkerson Company

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Submitted By someday009
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1. What is the competitive situation faced by Wilkerson?
There is a different competitive level in every Wilkerson product line.
Pumps, the major commodity product line is facing a very stiff price competition, which is behind the decline in the company profits and actual gross margin to less than 20%, compared to 35% planned gross margin. Consequently, the Wilkerson company needs to reduce the price every month to maintain the market leader position.
Wilkerson produces high quality products such as Valves, as well. Here Wilkerson gained very strong customer base and its competition seems to be moderate now. The firm also succeeded to maintain the actual gross margin around 35%. On the other hand, in the long run the company should be prepared to face strong price competition.
Additionally, there is a very inelastic demand in the Flow Controllers product. The company has recently raised the price by more than 10% with no apparent effect on demand. We assume that the competition is not very intense yet.

2. Given some of the apparent problems with Wilkerson’s 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? Why or why not?

The problem Wilkerson is facing due to its cost system is that the real manufacturing cost of each product includes very high proportion of overheads (52.5% of the total costs). This cost system distorts the real cost of products.

In the production scheme of Wilkerson, the company encounters very high proportion of overheads on total costs (52.5%). The production overheads are allocated to product expenses at 300% rate of labor costs. By adopting a contribution margin approach, the product profitability would be determined based on how much of fixed costs the product revenue can cover and how much

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