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Wilkerson Company Variance Analysis - Case Study Example

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This paper is about the reasons that caused the profits of Wilkerson Company to fall. In this paper I have used all the financial information that was given in the case and reached a conclusion. The conclusion was based on the comparisons of the data and my knowledge of the subject…
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Wilkerson Company Variance Analysis

Download file to see previous pages... However, one cannot give the real reasons behind this loss without first analyzing the data and comparing it with the standard target set by the company.
If we look at the data we might see that the variance between the actual and targeted price may have caused the profit to decline. We can see that the company was able sell valves at a price which was $.15 below the budgeted price. Since the total production of valves was 7500 units, the company incurred a negative variance of $1125. Similarly, if we look at the data of pumps, we can, again, see that there has been a massive variance among targeted and actual price. This variance amounts to $20.69 for each unit the company sells. Therefore, total variance based on the production of 12500 is $258625.This is a negative variance and it has resulted in the budgeted profit to go down. However, there is good news for the company in their third product flow-controllers, as the price of this product is rising. Therefore, the variance in this case is positive which is a good sign for the company. The variance in this case is $9.62. The total effect of this variance is $38480. From the above information, it can be said that the company should focus more on producing flow controllers than other products because of rising prices in this commodity which will ultimately lead to higher profits for the company.
Now, let's look at the machine hour variance. ...
This means that highest degree of efficiency is being maintained in machine processes. Similarly, same degree of efficiency is being maintained in the production of pumps and flow-controllers. This shows that there is been absolutely no variance among the actual and budgeted financial indicators, and the company is doing well here. Wilkerson management is also using the direct material very efficiently and there's no direct material usage variance.
Now, let's look at the gross profit margin of products that are produced by Wilkerson Company. In case of valves, we can see that there's a little change in this ratio. The budgeted margin was 35% whereas Wilkerson Company's actual margin is 34.9%. This small decrease in profit margin is a result of declining prices. The company is selling its products at 15 cents less than the budgeted price due to competition in the market. According to Randall (1996) there are various factors which might cause the company's gross profit margin to decline. These factors include: failure to control the cost of manufacturing, bad supervision of employees and wastage of resources etc. Looking at the gross-profit margin pumps, the budgeted gross profit margin was 35%, whereas Wilkerson's actual gross-profit margin is around 19% only. This massive decline again has been caused, again, by the price decline that has taken place in the industry due to stiff competition. As a result, firm has experienced massive reduction in gross profit margin. However, if we look at the data of flow-controllers, there has been an increase in the profit margin to 41% from the budgeted margin of 35%. This again is a result of ...Download file to see next pagesRead More
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