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The Perkins Cove Yacht Company Case

Perkins Cove Yacht Company produces three models of yachts. All are 44 feet long. One is a standard Fiberglass model
with nylon sails and a fixed keel made of lead and fiberglass named the Goose Rocks. It comes with a standard depth
finder, compass and 20 horsepower diesel auxiliary motor. It sells for $120,000.
The Kennebunkport model has upgrades with radar, GPS nautical charts, enhanced batteries, and Teflon coated carbon
fiber sails. The engine produces 100 horsepower and can run a cabin heater. It can completely recharge the battery in
less than an hour. The Kennebunkport sells for $200,000.
The Ogunquit model is a custom-made with a deck made from teak and a cabin constructed from special woods. The sails
are made from the traditional flax based canvass. The hull is from specially cut oak from local forests. It has the look of a
vessel constructed in 1850 by a quality Maine shipyard with 2016 comforts and safety. The Ogunquit sells for $800,000.
Workers who build the Ogunquit are specialty craftsmen. They earn twice the hourly rate of those working on the two
standard models. Note: Labor rate is fully loaded for benefits.
Most of Perkins Cove Yachts sales come from the Goose Rocks and the Kennebunkport, but sales of the Ogunquit model
have been growing. Below is the company's sales, production, and cost information for last year:

Yacht Goose Rocks Kennebunkport Ogunquit


Manufacturing overhead is made up as follows:
Volume 50 100 20 Depreciation 2200000
Price $120,000 $200,000 $800,000 Maintenance 700000
Unit costs Purchasing 180000
Direct Materials $30,000 $82,000 $250,000 Inspection 350000
Direct Labor $36,000 $51,000 $440,000 Indirect Materials 290000
Manufacturing Supervision 800000
$27,000 $27,000 $27,000
Overhead* Supplies 70000
Total Unit Cost $93,000 $160.00 $717,000 Total Manufacturing Overhead Cost 4590000
Unit Gross Profit $27,000 $40,000 $83,000

Direct Labor Hours 1,000 1000 4750


Rate per Hour $36.00 $51.00 $92.63
A. Manufacturing Overhead 4590000
Goose Rocks Kennebunkport Ogunquit
1,000 1000 4750
$ 680,000.00 $ 680,000.00 $ 3,230,000.00

B. The use of more than one cost pool improves Perkins Cove Yacht's cost allocation considering each pool is associated
with a driver that drives the associated cost per item. Knowing all the cost pools will give/lead to an accurate account
of overhead cost per yacht.

C Perkins Cove Yacht's controller developed the following data for use in activity-based costing:

Manufacturi
Cost Goose
ng Amount Kennebunkport Ogunquit
Overhead Driver Rocks
Square
Depreciation $2,200,000 20,000 30,000 30,000
Feet
Direct
Maintenance $700,000 Labor 50,000 100,000 95,000
Hours
# of
Purchasing $180,000 Purchase 1,500 1,500 6,000
Orders
# of
Inspection $350,000 400 800 2,000
Inspections
Indirect Units
$290,000 50 100 20
Materials Manufactured
Supervision $800,000 # of Inspections 400 800 2
Units
Supplies $70,000 50 100 20
Manufactured
Total $4,590,000
D. Use activity-based costing to allocate the costs of overhead per unit and in total to each yacht. Show all supporting calculations.
It is appropriate to use an excel document to do your computations in Excel.

Depreciation Cost Driver Goose Rocks Kennebunkport Ogunquit Totals


Maintenance $2,200,000 Square Feet 0.250 0.375 0.375 80000
Purchasing $700,000 Direct Lbr Hrs 0.204 0.408 0.388 245000
Inspection $180,000 # of Purchase Orders 0.167 0.167 0.667 9000
Indirect Materials $350,000 # of Inspections 0.125 0.250 0.625 3200
Supervision $290,000 Units Manufactured 0.294 0.588 0.118 170
Supplies $800,000 # of Inspections 0.125 0.250 0.625 3200
Total $70,000 Units Manufactures 0.294 0.588 0.118 170
$4,590,000
Costs of Overhead in total
Depreciation Cost Driver Goose Rocks Kennebunkport Ogunquit Totals
Maintenance $2,200,000.00 Square Feet $550,000.00 $825,000.00 $825,000.00 $2,200,000.00
Purchasing $700,000.00 Direct Lbr Hrs 142,857.14 285,714.29 271,428.57 700,000.00
Inspection $180,000.00 # of Purchase Orders 30,000.00 30,000.00 120,000.00 180,000.00
Indirect Materials $350,000.00 # of Inspections 43,750.00 87,500.00 218,750.00 350,000.00
Supervision $290,000.00 Units Manufactured 85,294.12 170,588.24 34,117.65 290,000.00
Supplies $800,000.00 # of Inspections 100,000.00 200,000.00 500,000.00 800,000.00
Total $70,000.00 Units Manufactures 20,588.24 41,176.47 8,235.29 70,000.00
$4,590,000.00 $972,489.50 $1,639,978.99 $1,977,531.51 $4,590,000.00

Costs of overhead per unit 50 units 100 units 20 units


Depreciation Cost Driver Goose Rocks Kennebunkport Ogunquit Totals
Maintenance $2,200,000.00 Square Feet $11,000.00 $8,250.00 $41,250.00 $60,500.00
Purchasing $700,000.00 Direct Lbr Hrs 2,857.14 2,857.14 13,571.43 19,285.71
Inspection $180,000.00 # of Purchase Orders 600.00 300.00 6,000.00 6,900.00
Indirect Materials $350,000.00 # of Inspections 875.00 875.00 10,937.50 12,687.50
Supervision $290,000.00 Units Manufactured 1,705.88 1,705.88 1,705.88 5,117.65
Supplies $800,000.00 # of Inspections 2,000.00 2,000.00 25,000.00 29,000.00
Total $70,000.00 Units Manufactures 411.76 411.76 411.76 1,235.29
$4,590,000.00 $19,449.79 $16,399.79 $98,876.58 $134,726.16
E. Calculate the cost of one custom Ogunquit yacht using activity-based costing
Ogunquit

Price $800,000.00
Direct Materials
Direct Labor $250,000.00
Manufacturing Overhead $440,000.00
Total Unit Cost $98,876.58
$788,876.58

F. Why are the costs different between the traditional method and the activity-based method?
The costs are different as tradtional costing assigned the above numbers to an average over head rate, where as activity based
costing broke down all activities associated with production and assigned them to cost drivers to reflect an accurate cost per item in
regards to overhead.

G. At the current selling price, is the company covering its true cost of production of the Ogunquit? Briefly discuss.

Based on the current selling price, the company is covering the true cost of production for the Qgunquit. The per unit cost of one
yacht is $788,876.58 where they are currently selling for $800,000. Based on the selling price of $800,000 the overhead for 20 units
is currently $1,997,531.51, which reflects within the current cost of overhead in total chart in question D.

H. What should be the price that Perkins Cove Yacht Company charges for the Ogunquit? Assume that the Ogunquit should have the
same profit margin as the Kennebunkport. Show all calculations.
Profit Margin for Kennebunkport:
$40,000.00
20% $948,876.58

Profit Margin for Ogunquit:


$11,123.42
1.39%

To get the Ogunquit profit margin to 20%, the price needs to be $948,876.58

I. What should Perkins Cove Yacht Co. do if the quantity of the Ogunquit yachts sold at the new price falls to 10 per year?

J. What should Perkins Cove Yacht Co. do about the situation if the price of the Ogunquit cannot exceed $800,000?

K. At a selling price of $800,000 each, what is the breakeven unit volume for the Ogunquit?

Price per unit 800,000 Breakeven (total fixed cost/unit contribution margin
Variable cost 1
Direct materials 250,000
Direct Labor 440,000
690,000 variable cost per unit
$ 110,000.00 contribution margin

L. What are the lessons learned from this case?

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