Perth Wheels makes car and truck wheels. The company makes 3 types ofbasic, high-volume wheels used by manufacturers of large cars and trucks and onespeciality,low volume wheel for luxury sports cars. Perth Wheels uses process costing system to calculate its product costs.

Lately, Perth Wheel's profits have been declining. Competitors are offering a lower price for 2 of the 3 basic product lines and Perth Wheel's sales and market share have fallen significantly. In contrast, Perth Wheels speciality wheel has been selling well despite three recent price increases. However, volume of sale for the speciality wheel is small compared to the high-volume basic wheels.

At a recent staff meeting, Perth Wheels managing director spoke about the issues faced by the company emphasizing the following:

1. Profits were declining.

2.International competitors were selling the basic wheels for $280 while it cost Perth Wheels $300 to make it. The basic wheels were Perth Wheels best-selling wheel last year with 25,000 units sold.

3. The speciality wheels were selling well, even though, they were complicated to manufacture. It had a product cost of $500 and were being sold for $1,100. The price was significantly lower than the other competitors in the market. The managing director insisted that salespersons should try and sell more of the speciality wheels to increase profits.

Required:

1.What do you think is contributing to the problems faced by Perth Wheels? (2 marks)

2.Do you think the managing director's remarks that salespeople should try and sell more of the speciality wheels to increase profits valid? Give reasons to support your answer (2 marks)

3. What would you recommend that Perth Wheels should do to help address the current situation? (2 marks)