Distortion of Product Costs

Wheelco, Inc.  manufactures automobile and truck wheels.  The company produces four basic, high-volume wheels used by each of the large automobile and pickup truck manufacturers. 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 it’s bread-and-butter product lines, and Wheelco’s sales volume and market share have declined.  In contrast, Wheelco’s specialty wheels have been selling steadily, although in relatively small numbers, in spite of three recent price increases.  At a recent staff meeting,  Wheelco’s president made the following remarks:  “Our profits are going down the tubes, folks.  It cost us 29 dollars 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 bucks.  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 my senator about it!  Thank goodness for our specialty wheels.  I think we’ve got to 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 dollars to make, and we’re selling them for 105 bucks each.”

In memo format. Using the numbering and/or bullet points, if needed

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1. Describe the accounting information that is missing, or you would like to know before you could advice Wheelco’s President. Give three examples.

2. Using the information from question 1, how would you advise him.

For more information on Distortion of Product Costs read this: https://en.wikipedia.org/wiki/Cost_accounting

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