JD finalsAssignment for the case study Wilkerson Company Prof. Mario Milone

Read carefully the case study entitled Wilkerson Company and answer the following questions.
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 assign- ment have on reported product costs and profitability? What causes any shifts in cost and profitability?
Based on your analysis for question 2, what actions might Wilkerson’s management team consider to improve the company’s profitability?
Financeaccount
ATTACHED FILE(S)
Assignment for the case study
Wilkerson Company
Prof. Mario Milone
Read carefully the case study entitled Wilkerson Company and answer the
following questions.
1. How does Wilkerson’s existing cost system operate? Develop a diagram
to show how costs flow from factory expense accounts to products.
2. 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 assign-
ment have on reported product costs and profitability? What causes any
shifts in cost and profitability?
3. Based on your analysis for question 2, what actions might Wilkerson’s
management team consider to improve the company’s profitability?
1
Copyright
Wilkerson Co.
Harvard Business School Case #101-092
Case Software #XLS007
Copyright © 2010 President and Fellows of Harvard College.No part of this product may be reproduced, stored in a retrieval system or transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the permission of Harvard Business School.
Exhibit 1
Exhibit 1 Wilkerson Company: Operating Results (March 2000)
Sales $2,152,500 100%
Direct Labor Expense 271,250
Direct Materials Expense 458,000
Manufacturing overhead
Machine-related expenses $336,000
Setup labor 40,000
Receiving and production control 180,000
Engineering 100,000
Packaging and shipping 150,000
Total Manufacturing Overhead 806,000
Gross Margin $617,250 29%
General, Selling & Admin. Expense 559,650
Operating Income (pre-tax) $57,600 3%
Exhibit 2
Exhibit 2 Product Profitability Analysis (March 2000)
Valves Pumps Flow Controllers
Direct labor cost $10.00 $12.50 $10.00
Direct material cost 16.00 20.00 22.00
Manufacturing overhead (@300%) 30.00 37.50 30.00
Standard unit costs $56.00 $70.00 $62.00
Target selling price $86.15 $107.69 $95.38
Planned gross margin (%) 35% 35% 35%
Actual selling price $86.00 $87.00 $105.00
Actual gross margin (%) 34.90% 19.50% 41.00%
Exhibit 3
Exhibit 3 Product Data
Product Lines Valves Pumps Flow Controllers
Materials per unit 4 components 5 components 10 components
2 @ $2 = $ 4 3 @ $2 = $ 6 4 @ $1 = $ 4
2 @ 6 = 12 2 @ 7 =14 5 @ 2 = 10
1 @ 8 = 8
Materials cost per unit $16 $20 $22
Direct labor per unit .40 DL hours .50 DL hours .40 DL hours
Direct labor $/unit @ $25/DL hour $10 $12.50 $10.00
(including employee benefits)
Machine hours per unit 0.5 0.5 0.3
Exhibit 4
Exhibit 4 Monthly Production and Operating Statistics (March 2000)
Valves Pumps Flow Controllers Total
Production (units) 7,500 12,500 4,000 24,000
Machine hours 3,750 6,250 1,200 11,200
Production runs 10 50 100 160
Number of shipments 10 70 220 300
Hours of engineering work 250 375 625 1,250
9 – 1 0 1 – 0 9 2
R E V :A U G U S T5 ,2 0 0 3

________________________________________________________________________________________________________________

Professor Robert S. Kaplan wrote this updated version of “Destin Brass Products Co.,” HBS No. 190-089, prepared by Professor William J. Bruns,
Jr. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.

Copyright © 2001 President and Fellows of Harvard College.To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu.No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.

R O B E R TS .K A P L A N
Wilkerson Company

The decline in our profits has become intolerable. The severe price cutting in pumps has
dropped our pre-tax margin to less than 3%, far below our historical 10% margins. Fortunately,
our competitors are overlooking the opportunities for profit in flow controllers.Our recent
10% price increase in that line has been implemented without losing any business.
Robert Parker, president of the Wilkerson Company, was discussing operating results in the latest
month with Peggy Knight, his controller, and John Scott, his manufacturing manager.The meeting
among the three was taking place in an atmosphere tinged with apprehension because competitors
had been reducing prices on pumps, Wilkerson’s major product line.Since pumps were a
commodity product, Parker had seen no alternative but to match the reduced prices to maintain
volume. But the price cuts had led to declining company profits, especially in the pump line
(summary operating results for the previous month, March 2000, are shown in Exhibits 1 and 2).
Wilkerson supplied products to manufacturers of water purification equipment. The company
had started with a unique design for valves that it could produce to tolerances that were better than
any in the industry. Parker quickly established a loyal customer base because of the high quality of its
manufactured valves. He and Scott realized that Wilkerson’s existing labor skills and machining
equipment could also be used to produce pumps and flow controllers, products that were also
purchased by its customers. They soon established a major presence in the high-volume pump
product line and the more customized flow controller line.
Wilkerson’s production process started with the purchase of semi-finished components from
several suppliers. It machined these parts to the required tolerances and assembled them in the
company’s modern manufacturing facility.The same equipment and labor were used for all three
product lines, and production runs were scheduled to match customer shipping requirements.
Suppliers and customers had agreed to just-in-time deliveries, and products were packed and
shipped as completed.
Valves were produced by assembling four different machined components.Scott had designed
machines that held components in fixtures so that they could be machined automatically. The valves
were standard products and could be produced and shipped in large lots. Although Scott felt several
competitors could now match Parker’s quality in valves, none had tried to gain market share by
cutting price, and gross margins had been maintained at a standard 35%.
This document is authorized for use by Yize Yuan, from 03/14/2022 to 06/10/2022
in the course: SP22 MGTF495-76905: Special Topic in Accounting: Strategic Cost Management & New Technologies (Milone) – MF22, University of California, San Diego
Any unauthorized use or reproduction of this document is strictly prohibited.
101-092 Wilkerson Company
2
The manufacturing process for pumps was practically identical to that for valves.Five
components were machined and then assembled into the final product.The pumps were shipped to
industrial product distributors after assembly. Recently, it seemed as if each month brought new
reports of reduced prices for pumps. Wilkerson had matched the lower prices so that it would not
give up its place as a major pump supplier.Gross margins on pump sales in the latest month had
fallen below 20%, well below the company’s planned gross margin of 35%.
Flow controllers were devices that controlled the rate and direction of flow of chemicals. They
required more components and more labor, than pumps or valves, for each finished unit.Also, there
was much more variety in the types of flow controllers used in industry, so many more production
runs and shipments were performed for this product line than for valves. Wilkerson had recently
raised flow controller prices by more than 10% with no apparent effect on demand.
Wilkerson had always used a simple cost accounting system. Each unit of product was charged
for direct material and labor cost. Material cost was based on the prices paid for components under
annual purchasing agreements. Labor rates, including fringe benefits, were $25 per hour, and were
charged to products based on the standard run times for each product (see Exhibit 3). The company
had only one producing department, in which components were both machined and assembled into
finished products. The overhead costs in this department were allocated to products as a percentage
of production-run direct labor cost. Currently, the rate was 300%.Since direct labor cost had to be
recorded anyway to prepare factory payroll, this was an inexpensive way to allocate overhead costs
to products.
Knight noted that some companies didn’t allocate any overhead costs to products, treating them
as period, not product, expenses.For these companies, product profitability was measured at the
contribution margin level ! price less all variable costs. Wilkerson’s variable costs were only its direct
material and direct labor costs. On that basis, all products, including pumps, would be generating
substantial contribution to overhead and profits. She thought that perhaps some of Wilkerson’s
competitors were following this procedure and pricing to cover variable costs.
Knight had recently led a small task force to study Wilkerson’s overhead costs since they had now
become much larger than the direct labor expenses. The study had revealed the following
information:
1. Workers often operated several of the machines simultaneously once they were set up. For
other operations, however, workers could operate only one machine. Thus machine-related
expenses might relate more to the machine hours of a product than to its production-run labor
hours.
2. A set-up had to be performed each time a batch of components had to be machined in a
production run.Each component in a product required a separate production run to machine
the raw materials or purchased part to the specifications for the product.
3. People in the receiving and production control departments ordered, processed, inspected,
and moved each batch of components for a production run. This work required about the
same amount of time whether the components were for a long or a short production run, or
whether the components were expensive or inexpensive.
4. The work in the packaging and shipping area had increased during the past couple of years as
Wilkerson increased the number of customers it served. Each time products were packaged
and shipped, about the same amount of work was required, regardless of the number of items
in the shipment.
This document is authorized for use by Yize Yuan, from 03/14/2022 to 06/10/2022
in the course: SP22 MGTF495-76905: Special Topic in Accounting: Strategic Cost Management & New Technologies (Milone) – MF22, University of California, San Diego
Any unauthorized use or reproduction of this document is strictly prohibited.
Wilkerson Company 101-092
3
Knight’s team had collected the data shown in Exhibit 4 based on operations in March 2000. The
team felt that this month was typical of ongoing operations. Some people recalled, however, that
when demand was really heavy last year, the machines had worked 12,000 hours in a month and the
factory handled up to 180 production runs and 400 shipments without experiencing any production
delays or use of overtime.

Exhibit 1 Wilkerson Company: Operating Results (March 2000)
Sales$2,152,500 100%
Direct Labor Expense271,250
Direct Materials Expense458,000
Manufacturing overhead
Machine-related expenses $336,000
Setup labor 40,000
Receiving and production control 180,000
Engineering 100,000
Packaging and shipping 150,000
Total Manufacturing Overhead806,000
Gross Margin$617,250 29%
General, Selling & Admin. Expense559,650
Operating Income (pre-tax)$57,600 3%
This document is authorized for use by Yize Yuan, from 03/14/2022 to 06/10/2022
in the course: SP22 MGTF495-76905: Special Topic in Accounting: Strategic Cost Management & New Technologies (Milone) – MF22, University of California, San Diego
Any unauthorized use or reproduction of this document is strictly prohibited.
101-092 Wilkerson Company
4
Exhibit 2Product Profitability Analysis (March 2000)

Valves Pumps Flow Controllers
Direct labor cost
Direct material cost
Manufacturing overhead (@300%)
Standard unit costs
$10.00
16.00
30.00
$56.00
$12.50
20.00
37.50
$ 70.00
$10.00
22.00
30.00
$ 62.00
Target selling price$86.15 $107.69 $95.38
Planned gross margin (%) 35% 35% 35%
Actual selling price $86.00 $87.00 $105.00
Actual gross margin (%) 34.9% 19.5% 41.0%

Exhibit 3 Product Data

Product Lines Valves Pumps Flow Controllers
Materials per unit 4 components
2 @ $2 = $ 4
2 @6 = 12
__________
5 components
3 @ $2 =$ 6
2 @7 =14
__________
10 components
4 @ $1 = $4
5 @2 =10
1 @8 =8
Materials cost per unit$16 $20 $22
Direct labor per unit .40 DL hours .50 DL hours .40 DL hours
Direct labor $/unit @ $25/DL hour
(including employee benefits)
$10 $12.50 $10.00
Machine hours per unit 0.5 0.5 0.3

Exhibit 4Monthly Production and Operating Statistics (March 2000)
Flow
ValvesPumps Controllers Total
Production (units) 7,500 12,500 4,000 24,000
Machine hours 3,750 6,250 1,200 11,200
Production runs 10 50 100 160
Number of shipments 1070220300
Hours of engineering work 250 375 625 1,250

This document is authorized for use by Yize Yuan, from 03/14/2022 to 06/10/2022
in the course: SP22 MGTF495-76905: Special Topic in Accounting: Strategic Cost Management & New Technologies (Milone) – MF22, University of California, San Diego
Any unauthorized use or reproduction of this document is strictly prohibited.

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