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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

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

Volume

50

100

20

Price

$120,000

$200,000

$800,000

Unit costs

Direct Materials

$30,000

$82,000

$250,000

Direct Labor

$36,000

$51,000

$440,000

Manufacturing

Overhead*

$27,000

$27,000

$27,000

Total Unit Cost

$93,000

$160.000

$717,000

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

Manufacturing overhead* is made up as follows:

Depreciation

$2,200,000

Maintenance

$700,000

Purchasing

$180,000

Inspection

$350,000

Indirect Materials

$290,000

Supervision

$800,000

Supplies

$70,000

Total Manufacturing Overhead Cost

$4,590,000

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

The company allocates overhead costs using the traditional method. Its activity base is direct labor hours. The predetermined overhead rate, based on 6,750 direct labor hours, is $680 per direct labor hour ($4,590,000 6,750 direct labor hours). Richard Perkins, president of Perkins Cove yacht, is concerned that the traditional cost-allocation system the company is using may not be generating accurate information and that the selling price of the custom Ogunquit may not be covering its true cost.

Questions:

  • The cost-allocation system Perkins Cove has been using allocates over 88% of overhead costs to the Goose Rocks and the Kennebunk because 88% of direct labor hours were spent on these three models. How much overhead was allocated to each of the three models last year? Discuss why this might not be an accurate way to assign overhead costs to products.
  • How would the use of more than one cost pool improve Perkins Cove Yacht's cost allocation?
  • Perkins Cove Yacht's controller developed the following data for use in activity-based costing:

Manufacturing

Overhead

Amount

Cost

Driver

Goose

Rocks

Kennebunkport

Ogunquit

Depreciation

$2,000,000

Square

Feet

20,000

30,000

30,000

Maintenance

$700,000

Direct

Labor

Hours

50,000

100,000

95,000

Purchasing

$180,000

# of

Purchase

Orders

1,500

1,500

6,000

Inspection

$350,000

# of

Inspections

400

800

2,000

Indirect

Materials

$290,000

Units

Manufactured

50

100

20

Supervision

$800,000

# of Inspections

400

800

2.000

Supplies

$70,000

Units

Manufactured

50

100

20

Total

$4,590,000

  • 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.
  • Calculate the cost of one custom Ogunquit yacht using activity-based costing.
  • Why are the costs different between the traditional method and the activity-based method?
  • At the current selling price, is the company covering its true cost of production of the Ogunquit? Briefly discuss.
  • 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.
  • What should Perkins Cove Yacht Co. do if the quantity of the Ogunquit yachts sold at the new price falls to 10 per year?
  • What should Perkins Cove Yacht Co. do about the situation if the price of the Ogunquit cannot exceed $800,000?
  • At a selling price of $800,000 each, what is the breakeven unit volume for the Ogunquit?
  • What are the lessons learned from this case?

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