The Perkins Cove Yacht Company Case

June 2018

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 quality of 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)

K.Part two: Explain and defend your analyses:

a. cost method comparisons and recommended “true cost” method (4 points).

b. recommended price assuming the “true cost” of production and the same profit margin as Goose Rocks (4 points).

c.projected break even unit volume at the recommended sale price (5 points)

d.recommended management action if the quantity falls to 10 per year (6 points).

e.projected break even unit volume assuming a maximum $1,050,000 sale price (5 points).

f.Recommended management action if $1,050,000 is the maximum sale price the market will bear (6 points).

g.Summarize the lessons learned from these analyses regarding cost, price, and volume ,and the effects of cost allocation methodology on management decisions. Defend your recommended decisions. (6 points to fully meet requirements; 4 extra points for exceptional quality of presentation)