Douglas College

Financial Analysis Report

Financial Analysis Report

4/1/2016
4/1/2016

Group Members: Kimhouy Bun 300247684
Mei Yao Liang 300252536
Nipa Chowdhury 300225853
Course Name: ACCT 3420-002
Instructor: Shirley Mauger
Date: April 01, 2016

Group Members: Kimhouy Bun 300247684
Mei Yao Liang 300252536
Nipa Chowdhury 300225853
Course Name: ACCT 3420-002
Instructor: Shirley Mauger
Date: April 01, 2016

Table of Content

I. PROBLEM IDENTIFICATION ……………..……… 3 II. ANALYSIS ………………………………………..….... 3 1. Overhead Assignment ………………………….…… 4 2. Activity-based Costing System ……………..…….… 5 a. Appendix ……………………………….……...... 5 b. ABC and Actual Production Volume ………….…... 5 c. ABC and Capacity Production Volume ……….….... 5 3. Expand and Analysis …………………………..…… 5 III. ALTERNATIVES AND EVALUATION …….……. 6 IV. RECOMMENDATION …………………………..…… 6

I. PROBLEM IDENTIFICATION
The main problem in this case is that Wilkerson is having difficulty appropriately pricing its products to retain gross margin in a competitive market. Price cutting by competitors led to a drop of Wilkerson’s pre-tax margin to under 3%, gross margin on sales for pump sales has fallen below 20% which is under the company’s plan. The problem in the current pricing method used by Wilkerson is that the real manufacturing cost of each product is not realistic because of the high proportion of overhead costs which are 806,000 of 1,535,250 (52.5%). The current method assumes the overhead costs are correlated to the labor costs at 300% rate, while many of the overhead activities are performed per product line regardless of the amount of units produced. II. ANALYSIS 1. The executives should abandon overhead assignment to products entirely by adopting a contribution margin approach but not in which manufacturing overhead is