The Perkins Cove Yacht Company Case

2019

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 $140,000.

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 $240,000.

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 2018 comforts and safety.The Ogunquit sells for $1,050,000.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 Yacht's 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

Volume

150

110

25

Price

$140,000

$240,000

$1,050,000

Unit costs

Direct Materials

$30,000

$92,000

$310,000

Direct Labor

$54,000

$85,000

$640,000

Manufacturing

Overhead*

$30,000

$30,000

$30,000

Total Unit Cost

$114,000

$207,000

$980,000

Unit Gross Profit

$26,000

$33,000

$70,000

Direct Labor Hours

1,200

1,300

5,940

Rate per Hour

$45.00

$65.38

$107.74

Manufacturing overhead* is made up as follows:

Depreciation

$3,200,000

Maintenance

$1,800,000

Purchasing

$320,000

Inspection

$850,000

Indirect Materials

$490,000

Supervision

$1,700,000

Supplies

$190,000

Total Manufacturing Overhead Cost

$8,550,000

*These manufacturing overhead costs are fixed in nature: they do not vary with the volume of manufacturing activity.

The company allocates overhead costs equally to each yacht.It prices to achieve more dollars of profit on the higher priced yachts.Richard Perkins, president of Perkins Cove yacht, is concerned that something seems wrong with the traditional costing system. The company may not be generating accurate information and that the selling price of the custom Ogunquit may not be covering its true cost.

Questions:

A. Part one: Create an excel file to show how much overhead was allocated to each of the three yacht models last year.Briefly explain the advantages and disadvantages of the current overhead allocation system (5 points to fully meet requirements; one extra point for exceptional quality of explanation).

B. What would be the advantages and disadvantages of using more than one cost pool? What cost pools would you recommend if more than one pool is used, and explain why you would recommend those pools (answer in Excel file, but no calculation required) (4 points to fully meet requirements; 2 extra points for exceptional quality of explanation)

C. Perkins Cove production manager proposes allocating overhead by direct labor hours since the different models of yachts require different amounts of labor.Show in your created excel file (response to question A above) how much overhead would be allocated to each yacht (per unit and in total) under this direct labor allocation. Show all supporting calculations, in a comparison table (comparing method A with method C) (6 points to fully meet requirements)

D. Perkins Cove Yacht's controller developed the following data for use in activity-based costing (method D):

Manufacturing

Overhead

Amount

Cost

Driver

Goose

Rocks

Kennebunkport

Ogunquit

Depreciation

$3,200,000

Square

Feet

50,000

30,000

30,000

Maintenance

$1,800,000

Direct

Labor

Hours

180,000

143,000

148,500

Purchasing

$320,000

# of

Purchase

Orders

2,500

1,500

9,000

Inspection

$850,000

# of

Inspections

1,000

850

3,500

Indirect

Materials

$490,000

Units

Manufactured

150

110

25

Supervision

$1,700,000

# of Inspections

1,000

850

3.500

Supplies

$190,000

Units

Manufactured

150

110

25

Total

$8,550,000

Use activity-based costing to allocate the costs of overhead per unit and in total to each yacht. Show all supporting calculations in your Excel file (6 points to fully meet requirements).

E. Calculate the cost of one custom Ogunquit yacht using activity-based costing (method D) and compare it to the traditional method (A). (4 points to fully meet requirements)

F. Briefly explain why the costs are different between these methods (3 points to fully meet requirements; one extra point for quality of explanation).

G. At the current selling price, is the company covering its true cost of production of the Ogunquit? Explain your reasoning (3 points to fully meet requirements; one extra point for quality of explanation).

H. What should be the price that Perkins Cove Yacht Company charges for the Ogunquita, if we assume that the Ogunquit should have the same profit margin as the Goose Rocks? Show all calculations for yourprice recommendation in your excel file (8 points to fully meet requirements)..

I. What should management do if the quantity of the Ogunquit yachts sold at the new price falls to 10 per year? Show the calculations for 10 sales per year, then answer the management question. (5 points to fully meet requirements; 3 extra points for exceptional quality of explanation)

J. Assuming a selling price of $1,050,000 each is all the market will bear, what is the breakeven unit volume for the Ogunquit?What should management do in that market situation? ((5 points to fully meet requirements; 3 extra points for exceptional quality of explanation)