Wilkerson Company (WC) is a manufacturing enterprise that provides parts for water purification equipment by processing semi-finished components. It machined three products, which are valves, pumps, and, flow controllers. Among the three, valve is a standard product which could be mass-produced and transported, as well as assembling 4 components in fixtures automatically; pump is the main product of the company, and the company is also the major suppliers of this product in the market; flow controller has the most varieties and product lines, as a result, it takes much more labour to finish each unit of this product. In terms of the business environment, the company has always been renowned for the superior quality of valves, therefore, the company has some loyal customers. But there is fierce competition for pumps, its market prices keep decreasing. Flow controllers have competitive advantage, because the price changes have little impact on demand. In corporate strategy, the company has established pumps batch production lines and customised flow controller lines; adopting just-in-time deliveries, turning down price of pumps and increasing 10% price of flow controllers. In management, the company has adopted simple cost system (SCS), while some companies are using contribution margin and treating overheads costs as period expenses.
WC is facing some problems, first of all, the company has suffered greatly in profits, as material costs are consistent in a year, overhead cost in this company is greater than direct labour cost, becoming the major issue. Statistics shows that gross margin and pre-tax operating income in March 2000 are 617250 and 57600 dollars respectively, taking up for 29% and 3% the overall sales (2152500 dollars). The pre-tax operating income is relatively low compared with the sales, one of the factors is the reduction price of pumps, the main product of this company. As the market average price of pumps experienced a downward trend, the company have to lower its price to maintain the marker share, the price reduced from 107.69 dollars per pump to 87 dollars, resulting a decrease of 19.2% selling price, and the actual gross margin is 19.5%, which is significantly low than the planed 35% margin. However, the increased price of flow controllers did not offset the impact of the drop in pumps. This suggests that this company relies too much on market conditions for price adjustments, rather than the cost of actual research. And the company do not have a budget, the adopted SCS may not indicate the real costs of the products. Furthermore, it is evident that the company has not reached its maximum production yield or not effectively operated in March 2000. Because statistics show that total machine hours in March 2000 is 11200, production runs are 160 and number of shipments is 300. However, according to historical data, at the peak of the market demand last year, the company was very efficient in manufacture process, specifically, machine hours are 12,000 per month, production runs are 180 and 400 shipments were made. Cleary, compared with the data last year, the company still have space for improvement in production.