Robert Parker, president of the Wilkerson Company, was discussing operating results in the latest month with Peggy Knight, his controller, and John Scott, his manufacturing manager. The meeting among the three was taking place in an atmosphere tinged with apprehension because competitors had been reducing prices on pumps, Wilkerson’s major product line. Since pumps were a commodity product, Parker had seen no alternative but to match the reduced prices to maintain volume. But the price cuts had led to declining company profits, especially in the pump line (summary operating results for the previous month, March 2000, are shown in Wilkerson Exhibits 1 and 2).

Required

1. Develop and diagram an activity- based costing system using information in the case. Calculate the profitability of Wilkerson’s three product lines. Are these profit abilities different from the profit abilities Wilkerson reports based on its current costing system.

2. Based on your analysis, what actions should Wilkerson’s management take to improve profitability.