The Perkins Cove Yacht Company Case

The Perkin" rel="nofollow">ins Cove Yacht Company Case Perkin" rel="nofollow">ins 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 fin" rel="nofollow">inder, 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 engin" rel="nofollow">ine produces 100 horsepower and can run a cabin" rel="nofollow">in heater. It can completely recharge the battery in" rel="nofollow">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" rel="nofollow">in 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" rel="nofollow">in 1850 by a quality Main" rel="nofollow">ine 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 workin" rel="nofollow">ing on the two standard models. Note: Labor rate is fully loaded for benefits. Most of Perkin" rel="nofollow">ins Cove Yacht’s sales come from the Goose Rocks and the Kennebunkport, but sales of the Ogunquit model have been growin" rel="nofollow">ing. Below is the company's sales, production, and cost in" rel="nofollow">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 Manufacturin" rel="nofollow">ing 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 Manufacturin" rel="nofollow">ing overhead* is made up as follows: Depreciation $2,200,000 Main" rel="nofollow">intenance $700,000 Purchasin" rel="nofollow">ing $180,000 Inspection $350,000 Indirect Materials $290,000 Supervision $800,000 Supplies $70,000 Total Manufacturin" rel="nofollow">ing Overhead Cost $4,590,000 *These manufacturin" rel="nofollow">ing overhead costs are fixed in" rel="nofollow">in nature: they do not vary with the volume of manufacturin" rel="nofollow">ing activity. The company allocates overhead costs usin" rel="nofollow">ing the traditional method. Its activity base is unit volume. The predetermin" rel="nofollow">ined overhead rate, based on 170 total yachts, is $27,000 per yacht ($4,590,000 ÷ 170 yachts). Richard Perkin" rel="nofollow">ins, president of Perkin" rel="nofollow">ins Cove yacht, is concerned that the traditional cost-allocation system the company is usin" rel="nofollow">ing may not be generatin" rel="nofollow">ing accurate in" rel="nofollow">information and that the sellin" rel="nofollow">ing price of the custom Ogunquit may not be coverin" rel="nofollow">ing its true cost. Questions: A. The cost-allocation system Perkin" rel="nofollow">ins Cove has been usin" rel="nofollow">ing allocates over 88% of overhead costs to the Goose Rocks and the Kennebunk because 88% of yachts produced were these two models. How much overhead was allocated, in" rel="nofollow">in total, to each of the three models last year? Discuss why this might not be an accurate way to assign overhead costs to products. B. Perkin" rel="nofollow">ins Cove’s production manager proposes allocatin" rel="nofollow">ing overhead by direct labor hours in" rel="nofollow">instead sin" rel="nofollow">ince the different models require different amounts of labor. How much overhead would be allocated to each yacht (per unit and in" rel="nofollow">in total) under this method? Show all supportin" rel="nofollow">ing calculations. C. How would the use of more than one cost pool improve Perkin" rel="nofollow">ins Cove Yacht's cost allocation? D. Perkin" rel="nofollow">ins Cove Yacht's controller developed the followin" rel="nofollow">ing data for use in" rel="nofollow">in activity-based costin" rel="nofollow">ing: Manufacturin" rel="nofollow">ing Overhead Amount Cost Driver Goose Rocks Kennebunkport Ogunquit Depreciation $2,200,000 Square Feet 20,000 30,000 30,000 Main" rel="nofollow">intenance $700,000 Direct Labor Hours 50,000 100,000 95,000 Purchasin" rel="nofollow">ing $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 costin" rel="nofollow">ing to allocate the costs of overhead per unit and in" rel="nofollow">in total to each yacht. Show all supportin" rel="nofollow">ing calculations. It is appropriate to use an excel document to do your computations in" rel="nofollow">in Excel. E. Calculate the cost of one custom Ogunquit yacht usin" rel="nofollow">ing activity-based costin" rel="nofollow">ing. F. Why are the costs different between the traditional method and the activity-based method? G. At the current sellin" rel="nofollow">ing price, is the company coverin" rel="nofollow">ing its true cost of production of the Ogunquit? Briefly discuss. H. What should be the price that Perkin" rel="nofollow">ins Cove Yacht Company charges for the Ogunquit? Assume that the Ogunquit should have the same profit margin" rel="nofollow">in as the Kennebunkport. Show all calculations. I. What should Perkin" rel="nofollow">ins Cove Yacht Co. do if the quantity of the Ogunquit yachts sold at the new price falls to 10 per year? J. What should Perkin" rel="nofollow">ins Cove Yacht Co. do about the situation if the price of the Ogunquit cannot exceed $800,000? K. At a sellin" rel="nofollow">ing price of $800,000 each, what is the breakeven unit volume for the Ogunquit? L. What are the lessons learned from this case?