E8.21 LO8.1 8.2 Distortion of product costs: manufacturer Spinning Wheels Pty Ltd (SW) manufactures car and truck wheels. The company produces four basic, highvolume 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, SWs profits have been declining. Foreign competitors have been undercutting SWs prices in three of its four major product lines, and its sales and market share have fallen significantly. In contrast, SWs speciality wheels have been selling steadily, although in relatively small numbers, in spite of three recent price increases. At a recent staff meeting, SWs 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. Thats 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 cant be making a profit. This is just another example of a foreign company dumping product on our shores. Its outrageous! Im 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 wheels more and more. Take the Z50 model, for example. Its a complicated thing to make and we dont sell many, but look at the profit margin. Those wheels cost us $50 to make, and were selling them for $110 each! Required: 1. Do you think the managing directors remarks are valid? What do you think is contributing to the problems faced by SW? 2. Do you think the managing directors 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.