Refer to the description of Wheelco Ltd in Exercise 8.21
Wheelco Pty Ltd manufactures car and truck wheels. The company produces four basic, high-volume wheels used by manufactures of large cars and trucks. 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 four major product lines, and Wheelco’s sales volume and market share have declined. In contrast, Wheelco’s speciality wheels have been selling steadily, although in relatively small numbers, in spite of three recent price increases. At a recent staff meeting, Wheelco’s managing director made the following remarks:
Our profits are going down the tube. It costs us $29 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. 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 to my local MP about it!
Thank goodness for our speciality wheels. We must 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 to make, and we’re selling them for $105 each.
1. List and briefly describe the key features that Wheelco’s new product costing system should include.
2. What impact will the new system be likely to have on the company’s situation?
3. What strategic options are likely to be considered once the results of the new costing system are examined?