I need help with question #5.

Managerial Accounting Homework 2 Group Assignment, Due on March-04 H. Xue Case \"Wilkerson Company\" The case is available for purchase at the NYUBookstore as a digital coursepack (in store or online at http://www.bookstores.nyu.edu). Form your own group of at most 4 students (including yourself). Each group submits one solution. Show your calculations for problems 2-5. 1. What is the competitive situation faced by Wilkerson? 2. What is the structure of the existing (traditional) costing system? Evaluate the features of this system. Should Wilkerson abandon its overhead cost allocation system and make managerial decisions based on contribution margin (price less variable costs); thereby in effect using marginal costs rather than average costs? Note: only direct materials and direct labor costs are assumed to be variable here. 3. Compute revised product costs based on an ABC (activity-based costing) analysis. Interpret your findings regarding the profitability of the different products. 4. Should Wilkerson worry about whether they are at or below full capacity when computing the OH rates? For example, March was a \"typical month\Jihyun Kim, Jimmy Chan, Kelly (Can) Wei, Vivian Fang Professor Hao Xue Managerial Accounting - 9:30am 4 March 2015 HW #2: Wilkerson Company 1. What is the competitive situation faced by Wilkerson? (Vivian) Wilkerson has three products: the valve, the pump, and the flow controller. The valve and pump products are produced at high volumes and are commodities, which represents a high threat of competition. Currently, competitors have cut prices for the pump, which forced Wilkerson to cut its prices as well, decreasing pre-tax margins from a historical 10% to less than 3%. Competitors have not yet cut prices for the valve, but Wilkerson believes competitors can match its quality in valves, so price competition in valves could very likely occur in the future. Wilkerson remains very competitive for its flow controller line, because it requires more components and is more customized. In fact, even when it raised prices by 10%, there was no apparent effect on demand. Still, the threat of competitors in its valve and pump lines remain a real threat to Wilkerson, and since there is limited room for innovation in the lines, Wilkerson must find a way to remain competitive and profitable. The just-in-time delivery of its supply chain, coupled with the intense price competition for the pump and high threat of price competition for its other lines, have forced Wilkerson to look for alternative costing methods to combat its increasing overhead costs. 2. What is the structure of the existing (traditional) costing system? Evaluate the features of this system. Should Wilkerson abandon its overhead cost allocation system and make managerial decisions based on contribution margin (price less variable costs); thereby in effect using marginal costs rather than average costs? Note: only direct materials and direct labor costs are assumed to be variable here. (Vivian) Currently, Wilkerson uses a traditional volume-based costing system. According to Exhibit 3 and the case, each unit of product is charged for direct material and labor cost. Manufacturing overhead costs are allocated to products as a percentage of production-run direct labor cost--currently at a rate of 300%, which means overheads are very high, and are thus significant contributors to decision-making. This current volume-based costing system may lead to wrong pricing decisions and ineffective product management. This is because the current costing method assumes a direct relationship between the volume of production of individual products and the level of overhead. This is not necessarily the case because each product varies significantly in overhead cost association and the method fails to capture the difference in competitive situations between the three products. Wilkerson also should not use the contribution margin approach. This type of method would work for short-term decision-making because the decision to accept/reject is based on variable costs, but it would be insufficient in the long-run because you would want to make sure each product is at a minimum breakeven. As we can see from Exhibit 3, only the Valves and Flow Controllers product lines have attained minimum breakeven; Pumps are at 19.5%, below the standard 35%. 3. Compute revised product costs based on an ABC (activity-based costing) analysis. Interpret your findings regarding the profitability of the different products. (Kelly) Activity Based Costing Per Unit Valves Pumps Flow Controllers Production Units 7500 12500 4000 Direct Direct Labor Cost $10.00 $12.50 $10.00 Costs: Direct Materials Cost $16.00 $20.00 $22.00 OH: Machine-related expenses $15.00 $15.00 $9.00 Setup labor $0.33 $1.00 $6.25 Receiving and production control $1.50 $4.50 $28.13 Engineering $2.67 $2.40 $12.50 Packaging and shipping $0.67 $2.80 $27.50 $46.17 $58.20 $115.38 Total Costs: Volume-based costing: Activity-based costing: Actual selling price Standard unit costs Actual gross margin Standard unit costs Actual gross margin Valves $86.00 $56.00 34.90% $46.17 46.31% Pumps $87.00 $70.00 19.50% $58.20 33.10% Flow Controllers $105.00 $62.00 41.00% $115.38 -9.89% Under activity-based costing, gross margin for Valves and Pumps go up significantly, but gross margin for Flow Controllers decreases significantly. This costing method shows that the Valves are profitable, and Wilkerson can actually decrease its selling price to be more competitive, if necessary. The same holds true for Pumps. However, Flow Controllers has a very high cost under the ABC method, and in fact has a negative margin. Since Wilkerson is very competitive in this market, and since demand has been seemingly inelastic in the past, Wilkerson can increase the price of the Flow Controllers in order to be profitable. 4. Should Wilkerson worry about whether they are at or below full capacity when computing the OH rates? For example, March was a \"typical month\Jihyun Kim, Jimmy Chan, Kelly (Can) Wei, Vivian Fang Professor Hao Xue Managerial Accounting - 9:30am 4 March 2015 HW #2: Wilkerson Company 1. What is the competitive situation faced by Wilkerson? (Vivian) Wilkerson has three products: the valve, the pump, and the flow controller. The valve and pump products are produced at high volumes and are commodities, which represents a high threat of competition. Currently, competitors have cut prices for the pump, which forced Wilkerson to cut its prices as well, decreasing pre-tax margins from a historical 10% to less than 3%. Competitors have not yet cut prices for the valve, but Wilkerson believes competitors can match its quality in valves, so price competition in valves could very likely occur in the future. Wilkerson remains very competitive for its flow controller line, because it requires more components and is more customized. In fact, even when it raised prices by 10%, there was no apparent effect on demand. Still, the threat of competitors in its valve and pump lines remain a real threat to Wilkerson, and since there is limited room for innovation in the lines, Wilkerson must find a way to remain competitive and profitable. The just-in-time delivery of its supply chain, coupled with the intense price competition for the pump and high threat of price competition for its other lines, have forced Wilkerson to look for alternative costing methods to combat its increasing overhead costs. 2. What is the structure of the existing (traditional) costing system? Evaluate the features of this system. Should Wilkerson abandon its overhead cost allocation system and make managerial decisions based on contribution margin (price less variable costs); thereby in effect using marginal costs rather than average costs? Note: only direct materials and direct labor costs are assumed to be variable here. (Vivian) Currently, Wilkerson uses a traditional volume-based costing system. According to Exhibit 3 and the case, each unit of product is charged for direct material and labor cost. Manufacturing overhead costs are allocated to products as a percentage of production-run direct labor cost--currently at a rate of 300%, which means overheads are very high, and are thus significant contributors to decision-making. This current volume-based costing system may lead to wrong pricing decisions and ineffective product management. This is because the current costing method assumes a direct relationship between the volume of production of individual products and the level of overhead. This is not necessarily the case because each product varies significantly in overhead cost association and the method fails to capture the difference in competitive situations between the three products. Wilkerson also should not use the contribution margin approach. This type of method would work for short-term decision-making because the decision to accept/reject is based on variable costs, but it would be insufficient in the long-run because you would want to make sure each product is at a minimum breakeven. As we can see from Exhibit 3, only the Valves and Flow Controllers product lines have attained minimum breakeven; Pumps are at 19.5%, below the standard 35%. 3. Compute revised product costs based on an ABC (activity-based costing) analysis. Interpret your findings regarding the profitability of the different products. (Kelly) Activity Based Costing Per Unit Valves Pumps Flow Controllers Production Units 7500 12500 4000 Direct Direct Labor Cost $10.00 $12.50 $10.00 Costs: Direct Materials Cost $16.00 $20.00 $22.00 OH: Machine-related expenses $15.00 $15.00 $9.00 Setup labor $0.33 $1.00 $6.25 Receiving and production control $1.50 $4.50 $28.13 Engineering $2.67 $2.40 $12.50 Packaging and shipping $0.67 $2.80 $27.50 $46.17 $58.20 $115.38 Total Costs: Volume-based costing: Activity-based costing: Actual selling price Standard unit costs Actual gross margin Standard unit costs Actual gross margin Valves $86.00 $56.00 34.90% $46.17 46.31% Pumps $87.00 $70.00 19.50% $58.20 33.10% Flow Controllers $105.00 $62.00 41.00% $115.38 -9.89% Under activity-based costing, gross margin for Valves and Pumps go up significantly, but gross margin for Flow Controllers decreases significantly. This costing method shows that the Valves are profitable, and Wilkerson can actually decrease its selling price to be more competitive, if necessary. The same holds true for Pumps. However, Flow Controllers has a very high cost under the ABC method, and in fact has a negative margin. Since Wilkerson is very competitive in this market, and since demand has been seemingly inelastic in the past, Wilkerson can increase the price of the Flow Controllers in order to be profitable. 4. Should Wilkerson worry about whether they are at or below full capacity when computing the OH rates? For example, March was a \"typical month\