9-101-092
REV: AUGUST 5, 2003

ROBERT S. KAPLAN

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, …show more content…

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. 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. 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. The work in the packaging and shipping area had increased during the past couple of years as Wilkerson increased the number of