Distortion of product costs: manufacturer

Spinning Wheels Pty Ltd (SW) manufactures car and truck wheels. The company produces four basic, high-

volume wheels used by manufacturers of large cars and trucks. SW also has two speciality wheel lines, which

are designed for use on expensive sports cars. SW costs all its products using a conventional volume-based

costing system.

Lately, SW' profits have been declining. Foreign competitors have been undercutting SW's prices in three

of its four major product lines, and its sales and market share have fallen significantly. In contrast, SW's

speciality wheels have been selling steadily, although in relatively small numbers, In spite of three recent price

increases.

Al a recent staff meeting, SW's managing director spoke about the issues faced by the company:

Our profits are going down the tube. It costs us $30 to manufacture our X25 wheel. That's our best seller,

with a volume last year of ,20 000 units. But our chief competitor, based overseas, is selling essentially the

same wheel for $28. They can't be making a profit. This is just another example of a foreign company

dumping product on our shores. It's outrageous! I'm going to write to my local MP. The government needs

to do something about this!

On a bright note, thank goodness for our speciality wheels. Our salespeople have to push these whel's

more and more. Take the Z50 model, for example. It's a complicated thing to make and we don't

sell many, but look at the profit margin. Those wheels cost us $50 to make, and we're selling them for

$110 each!

Required:

1)Do you think the managing director's remarks are valid? What do you think is contributing to the problems

faced by SW?

2. Do you think the managing director's suggestion to push the sale of speciality wheels is a good one?

Justify your response.

3.What would you recommend that SW do to help address its situation? Justify your recommendations.

CHAPTER EIGHT ACTIVITY-BASED COSTING

9. Pressing: After removal from the stemmer/crusher, the juice runs freely from the grapes.

10. Filtering: The grapes are crushed mechanically to obtain more juice from them.

11. Fermentation: The riesling grape juice is placed in steel tanks for fermentation. The chardonnay grape

juice undergoes a two-stage fermentation process in oak barrels.

12. Ageing: The riesling wines are aged in the steel tanks for about one year. The chardonnays are aged in the

oak barrels for about two years.

13. Bottling: A machine bottles the wine and corks the bottles.

14. Labelling: Each bottle is manually labelled with the name of the vintner, vintage and variety.

15. Packing: The bottles are manually packed in 12-bottle cases.

16. Case labelling: The cases are hand-stamped with the same information given on the bottle labels

17. Shipping: The wine is shipped to wine distributors and retailers, mainly in Sydney and Melbourne. Generally.

about 100 cases are shipped at a time.

18. Maintenance on buildings: This is done during the slow winter months.

19. Maintenance on equipment: This is done when needed, and on a routine basis for preventative maintenance,