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Wilkerson Final

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Jessica Dana

on 17 November 2012

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Transcript of Wilkerson Final

Variable Costs:
Direct Labor
Direct Materials Simp Production & Manufacturing Finished Goods:
Flow Controllers Manufacturing
Overhead Wilkerson Company
Profitability Simple Cost Accounting
Activity-Based Costing Thank you
for your time and consideration.

Questions? Adopt Activity-Based Costing

Address Packaging & Shipping costs
Evaluate Customer Profitability
Implement minimum order requirement
Realize cost saving of $70,000

Increase Sales Price of Flow Controllers
14% Price increase

Long Term Opportunity
Excess capacity Implementation Flow Controller Adjustment Analysis Disadvantages
Idle capacity
Loss of customer base Alternative 2: Eliminate Flow Controller Alternatives Manufacturing Overhead Sales by Product Improve pre-tax net operating margin to historical rate of 10%

Analyze cost accounting structure
Identify opportunities
Provide alternative solutions
Propose a final recommendation Goal Simple cost accounting system
Inappropriately allocates overhead cost to products

Loss of top line revenue
Severe price cut within pumps
Reduced pre-tax margin from a historical 10% to < 3%

Loss of competitive advantage
Competitors have improved quality Critical Issues Manufactures water purification equipment

Unique high-quality valve design

Capitalized on other opportunities by introducing additional product lines Wilkerson Company Company Overview
Business Problem
Critical Issues
Action Plan Agenda Initial assumptions were flawed with simple cost accounting method

Activity-Based Costing allocates appropriate overhead costs to products

ABC method provides more accurate data to make pricing and process recommendations Conclusion Alternative 3: Review Product Line Profitability
and Make Adjustments Valves: Largest Profit Margin
Increase production
Concentrate on increasing market
share by given incentives for larger quantities (discount or longer terms)

Pumps: Acceptable Profit, But Competitive
Continue selling pumps at competitive prices
Set minimum quantity on orders
to lower MOH costs (ship & pack) Advantages
Eliminates negative gross margin
Operating income increases by 3% Alternative 2: Eliminate Flow Controller Advantages
No Changes
Business as usual

Flow controllers continue to negatively impact gross margin
Pump pricing may continue to fall
Excess Capacity Alternative 1: Status Quo Method of matching costs to activities

Better able to make strategic decisions

Allocate Manufacturing Overhead to products Activity-Based Costing Product Profitability Analysis
Simple Cost Accounting Analysis
Overall pre-tax operating income
has fallen from a historical rate of
10% to less than 3% Business Problem Michelle Calanchini
Jessica Dana
Paul Dobrovolsky
Mike Herrick Recommendation Purchase Materials and
Semi-finished Components
from Suppliers Production Process Ship Product
to Customer
(just-in-time shipping) Machine Components
to Order Valves
Original product line
Maintained 35% gross margin

Matched competitor price reductions

Flow Controllers
Recent 10% price increase did
not affect demand Products Current Simple Cost System Allocate Cost Pools to Cost Objects Allocate Engineering to Products Activity Based Costing Analysis Total Per-Unit Cost Analysis Flow Controller Cost Analysis
Flow Controllers:

Reduce the variety of flow controllers produces
Increase price
Concentrate on high volume customers
Set minimum quantity on orders to lower
MOH costs (ship & pack) Alternative 3: Review Product Line Profitability
and Make Adjustments Advantages
Eliminates negative gross margin
Raises profitability
Maintains full offerings to customers
Maintains competitive advantage
No operational/production
Risk of price sensitivity
Decreased demand based on market
conditions Alternative 3: Review Product Line Profitability
and Make Adjustments Adopt Alternative 3 Wilkerson Company Short Term Actions Reduce Shipping & Packaging costs by 45%
Take a 14% price increase for flow controllers
Actions will result in a 5.8% net improvement Long Term Action Address excess capacity Review Product Line Profitability and Make Adjustments Recommendation Action Plan
Full transcript