Answer 1:

On a per unit basis, based on ABC analysis, following are the cost at a product level.
Product A: $46.17
Product B: $58.20
Product C: $115.38.
Attached excel sheet provides step-by-step analysis and approach to calculating the per
unit costs based on ABC analysis.
Answer 2:
Compared to standard cost analysis, ABC analysis results in an appropriate allocation of
costs at a product level leading to more accurate decision on product portfolio. For e.g.,
in case of Wikerson Company, analysis revealed that, Valves and Pumps were being
burdened with higher costs whereas Flow controllers was allocated significantly lower
manufacturing OH. Table 1 below shows the comparison on standard costs versus ABC at
a product level. Refer to table 2 below:

Table 2: Comparison of Standard versus ABC costing

Causes:
Such over and under allocation of costs under Standard cost analysis often results from
linking overheads costs (in this case $806K of Manufacturing OH) to single cost driver
such as direct labor. ABC analysis correctly identifies the cost driver for each subcomponent of Manufacturing OH and then allocates the cost bases on capacity/utilization
at a product level.

Answer 3:
Based on ABC analysis, following decisions can help to further improve the profitability
of Wikerson Company. Refer to table 3 below
1. Valves: Based on costs (as per ABC analysis) and target gross margin levels of 35%,
Wikerson can lower the selling price by 17% to $71. Decision to lower the price could
lead to further increase in volume that will generate higher absolute profits from Valves.
2. Pumps: Wikerson should increase the selling price by 3% from the current levels to get
the targeted 35% GM levels. This could however, lead to lower volumes for Pumps
which will impact the overall cost allocation as the utilization of cost drivers (activities)
will change.
3. Flow controllers: Two possible options
A. Eliminate Flow controllers product line: ABC analysis showcased that at a product
level, Flow Controllers is generating negative gross margin of 9.9%. Given the negative
margin, it is advisable to stop selling flow controllers.
B. Increase price by 69%. Given the expectation of generating 35% gross margin,
Wikerson will have to increase the price of Flow controllers by whopping 69% to
$177.49 per unit. Alternatively, GM expectations at a product level should be altered
based on realistic market conditions of each product.

Table 3: Selling price analysis: