Wilkerson Company Case Summary

Wilkerson Company is facing fierce competition in the water purification equipment business that could potentially cannibalize their sales. In matching the lower prices set by the competition, Wilkerson’s profits and pre-tax margins have declined as a result. Despite lowering the prices of pumps, which are Wilkerson’s major product line, the product’s gross margin has fallen under 20% - which is 15% below the company’s expectations. In light of these challenges, Wilkerson Company decided to examine their overhead costs.

II. Standard Unit Costs vs. Activity Based Costing Analysis Wilkerson uses a simple cost accounting system in which each unit is charged for direct labor and material costs in addition to overhead costs, which are allocated depending on the percentage of production-run direct labor usage. Under this system, the overhead percentage set by Wilkerson was 300%. This standardized system, however, did not reflect the specific complexities of each

Strategic Implications and Recommendations

The first implication that would arise from adopting the ABC system is that flow controllers will become an unprofitable product. In order to meet the “planned gross margin” of 35%, the company will have to charge $155 for flow controllers, which would be about a 48% increase from its current selling price. This could mean that flow controllers either will drop sharply in sales or will be eliminated altogether from the business, causing the company to lose a source of revenue. The accuracy of ABC results are also up to debate since set-up costs were calculated using production-runs as a cost driver while the case does not explicitly mention the dynamics or mechanisms of each product’s set-up. My recommendation for Wilkerson would be to keep their standard accounting system and to capitalize upon the relative inelasticity of flow controller’s demand by increasing their prices by about 10% in order to match the inherent labor-intensive nature of the