The president of Wilkerson, struggling with decreasing income and revenue, is challenged to comprehend why the firm is faced with tough price rivalry on one product line whereas it is capable of generating prices without any competition or competitor reaction on another product line. The controller suggests that the company build an activity-based cost (ABC) model to be able to better apprehend the distinctneeds and demands of each of the two product lines on the firm’s indirect and support assets. A redraftedaccount of a prior case.
Product Profitability Analysis
Monthy Production and Operating Statistics
Activity Based Costing
Acivity Cost pool and Measures
Acivity Cost pool and Cost Driver Rate
Unit Cost Of Product Line
Product wise Operating results
What is the competitive situation faced by Wilkerson?
Given some of the apparent problems with Wilkerson's cost system, should executives abandon overhead assignment to producer entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Why or why not?
How does Wilkerson's existing cost system operate? Develop a diagram to show how costs flow from factory expense accounts to products.
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?
Based on the results of your activity-based cost model, what actions might Wilkerson's management team consider to improve the company's profitability?
What concerns, if any, do you have with the cost estimates you prepared in the answer to Question 4? What other information or analysis would you want for better cost and profitability estimates?
Wilkerson has been compensating salespersons with commissions on their gross sales volumes (less returns). Parker wonders whether the company should change this incentive system.