The decline in our profits has become intolerable. The severe price cutting in p

Question

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 man among the three was taking place in an atmosphere tinged with apprehension because competit 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) ufacturing manager. The meeting ors 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 rchased by its customers. They soon established a major presence in the high-volume pump pu 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 several suppliers. I ny's modern manufacturing facility. The same equipment and labor were used for all three compa roduct 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 produc ere produced by assembling four different mac t hel hined components. Scott had designed ld components in fixtures so that they could be machined automatically. The valves machined auto Scott hd de competitors c were stitors 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% machines that held com products and could be produced and shipped in large lots. Although Scott felt several

Explanation / Answer

Answer:d) Yes, the approach can be extended to service companies and much larger companies than Wilkerson.The Towerton case in this chapter provides such an example.

Time-driven activity-based costing reduced some of the barriers associated with developing and updating the common approach to activity-based costing, which assigns many resource expenses to activities based on interviews and surveys. Nevertheless, barriers and difficulties associated with managing any major change remain. For example, individuals may feel vulnerable facing uncertainty about what the time-driven activity-based cost analysis may show. The analysis might reveal that products or customers thought to be very profitable are actually unprofitable, some processes are inefficient, or there is substantial unused capacity. Individuals may be concerned that they will then be judged as poor managers, even though they were making decisions that others would agree were good decisions based on the cost system that was in place.

Answer:e)

The company should reconsider its product strategy and focus on its core products—valves and pumps. Wilkerson might attempt to increase market share in valves by offering discounts for large orders of valves. Furthermore, Wilkerson could reduce discounting for pumps, especially for small orders. Finally, Wilkerson should aggressively raise prices for flow controllers or accept orders to produce flow controllers only when the pricing and order size indicate that they can be sold at a profit; Wilkerson could establish a minimum order size.

Wilkerson can also focus on improving processes. For example, the company could reduce setup times or schedule production of components for multiple product orders to share components across multiple batches. These improvements, in conjunction with the focus on larger orders, should lead to many fewer production runs and shipments, allowing for the possibility of reducing capacity and related costs.

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