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 its 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 costs 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 0)2 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 10) bucks each:”
Required: What do you think is behind the problems faced by Wheeleo? Comment on the president’s remarks, Do you think his strategy is a good one? What do you recommend,and why?
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