Wheelco, Inc. manufactures automobile and truck wheels. The company produces four basic, high-volume wheels used by each of the large automobile and pickup truck manufacturers. Wheelco also has two specialty wheel lines. These are fancy, complicated wheels used in expensive sports cars.

Lately, Wheelco's profits have been declining. Foreign competitors have been undercutting Wheelco's prices in three of its bread-and-butter product lines, and Wheelco's sales volume and market share have declined. In contrast, Wheelco's specialty wheels have been selling steadily, although in relatively small numbers, in spite of three recent price increases. At a recent staff meeting, Wheelcos president made the following remarks: "Our profits are going down the tubes, folks. It cost us 29 dollars to manufacture our A22 wheel... That's our best seller, with a volume last year of 17,000 units. But our chief competitor is selling basically the same wheel for 27 bucks. I don't see how they can do it. I think it's just one more example of foreign dumping. I'm going to write my senator about it! Thank goodness for our specialty wheels. I think we've got to get our salespeople to push those wheels more and more. Take the D52 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 49 dollars to make, and we're selling them for 105 bucks each."

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This is a difficult situation that Wheelco is facing, but I dont think it is as simple as the president is making it seem.

Missing information

Id first like to know what type of costing system is being used to determine the cost per unit. There are many costs and factors that could be included in that number, so Id like to know which costs are being used and which ones are excluded.

If a specific costing system is being used, I want to know what cost driver was chosen and how it was chosen. Again, there are many costs that can be used as the driver, but I want to make sure it is one that makes sense and shows a reliable correlation.

I would like to see historical data. Has the company always had higher priced items or is this a recent issue? This will help to identify potential costs that can be reduced or addressed in the future.

Analysis

Using activity based costing, the company needs to figure out what is making the cost of the A22 so high. The foreign companies may be producing their products at a lower price because they have minimized overhead costs. Wheelco needs to analyze their costs and see if there are areas to cut down.

I would advise the president to graph out the costs. This way, the company can analyze costs and identify the low end, high end, and outliers in the data.

Once graphed, I would advise them to use cost estimation methods. They have plenty of data to work with and this will help to reduce costs and budget for the future.