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1. According to the case, if using ABC, Wilkerson should pool overheads into five activities: machine-related expenses, setup labor cost, receiving and production control cost, engineering cost, and packaging and shipping cost. The cost pool/cost driver information for an Activity Based Costing (ABC) system for Wilkerson has already provided by table
2. Based on the information on table 1 and four exhibit in case, we can figure out that the total cost per unit of valves, pumps and flow controllers are $46.17, $58.20, and $115.38, respectively, by using the Activity Based Costing system.
Computation Process shows on table
3. After computation, the gross margin % for each product using ABC shows on table
4. The actual gross margin % for valves, pumps and flow controllers are 46.30%, 33.10% and -9.90%, respectively.
5. The difference in the gross margin for flow controllers when the Traditional Cost System is used and when the ABC Cost System is used is caused by the different allocation approach of overhead, increasing manufacturing overhead from $30.00 to $83.38 significantly. Flow controllers were low volume products, but they required more resource.
Due to the fact that flow controllers required not only more components and more labor, than pumps or valves, for each finished unit, but also more production runs and shipments, these operating process contributed substantial overhead costs. These overhead costs, however, were not be allocated in the traditional cost system. Compared to the traditional cost system, in which the overhead costs just were allocated to products as a percentage of production-run direct labor cost easily, the ABC cost system provides more accurate information about overhead costs.
6. In order to maintaining Wilkerson Company’s market share of valves and pumps, they have the room to reduce valves and pumps’ price, although they may do not need to reduce their price. Meanwhile, they should increase the price of flow controllers to increase gross margin of these products. The reason that the company raised flow controller prices recently with no apparent effect on demand because the products were underpriced. They should deal with the negative profitability immediately. For the long run, probably the company needs to review their manufacturing operation process. They may have ability to reduce their production runs by innovation. Moreover, they can increase shipping batch size by negotiating with customers to increase order size, which will reduce the number of shipments to saving costs. These approaches will reduce their overhead costs, increasing their profitability.
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