Wilkerson, a mid-sized manufacturing company that produces water purification systems, is seeing a decline in margins. The company has one production department that machines and assembles three products: valves, pumps, and flow controllers. Wilkerson uses a volume-based costing system that may be incorrectly allocating overhead costs. Alternatives are analyzed to address the profitability of specifically the flow controller product line and combat the declining margins, including adjusting the cost accounting method or changing the flow controller's pricing.

1. 1WilkersonElla ShenDonna HuangSummer HuWilliam LuNora Wang Alex Zhang

2. 2Agenda

3. 3Company OverviewObjectivesUnderstand the underlying reason of Wilkerson’s decreasing margin

4. Combat the declining margin

5. Profit maximizeBackgroundsA mid-sized manufacturing company for water purification system

6. It specializes in producing of 3 products:

7. valve, pump and flow controllerStrategyHas only one producing department, where all components are machined and assembled

8. Uses volume-based costing because it is less costly3

9. 4Manufacturing Process

10. 5Market Analysis- PEST

11. 6Porter’s 5 Forces Analysis- Rivalry

12. 7Porter’s 5 Forces Analysis- Buyer Power

13. 8Porter’s 5 Forces Analysis- Supplier Power

14. 9Porter’s 5 Forces Analysis-Threats of New Entrance

15. 10SWOTStrengthsHigh quality productCustomer loyaltyJust-in-time deliveriesWeaknessesCost accounting systemNon-value added activitiesOpportunitiesPotential profit in flow controllerThreatsFierce competition10

16. 11Competitive Strategy

17. 12Problems:Inappropriate cost allocating methodOverhead @300% of direct labour costsReasonsUsage of overhead activity is not in proportion to the volume of outputWrong cost drivers for overhead expenseImplicationsCausesMisleading Profitability AnalysisInappropriate Pricing DecisionIneffective cost managementProblem

18. 13Alternatives

19. 14VBC v.s ABC

20. 15Profitability

21. 16Flow Controller

22. 17Status Quo

23. 18Alternative 2- drop flow controller line3.04% Increase

24. 19Alternative 2:Drop the Flow Controller

25. 20Alternative 3: Adjustment to flow controllerGoalregain net profit to 10%

26. G.M on flow controller: increase to 27%Implementation1. solely on price adjustment2. reduce cost then increase priceprice increase by 50%

27. breakeven point analysis  8.7% reduction in cost

28. price need to be set around $14321Per unit cost under ABC

29. 22Alternative 3: Adjustment to flow controller

30. 23Matrix

31. 24Implementation- Master PlanChange volume base costing to activity based costingHighIncrease the price of Flow Controllers0.5 yearsReduce the cost of non-value added activitiesMediumReduce the price of valves and pumps if price competition occurs1 yearLowTime from Today1.5 years +

32. 25LimitationsUnable to determine the demand curve and supply curve

33. So does the equilibrium price and quantity

34. All price and cost given for flow controller is an averageRisks & Mitigation

35. 26Thank you for listening!Questions?

36. 271. US Government Info: Bush Tax Cuts: It's Your Money http://usgovinfo.about.com/library/weekly/aa010201a.htm 2． Bureau of Economic Analysis, Department of Commerce http://www.bea.gov/newsreleases/national/gdp/2000/gdp200a.htm3. Gross Domestic Product by Industry for 1998–2000 http://www.bea.gov/scb/pdf/2001/11november/1101gdpxind.pdfReferences

37. 28Volume-Based Costing

38. 29ABC Cost Driver Rate