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[SOLVED] The Perkins Cove Yacht Company CasePerkins

[SOLVED] 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 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 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
unit volume. The predetermined overhead rate, based on 170 total yachts, is $27,000 per yacht
($4,590,000 ÷ 170 yachts). 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:

A. 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 yachts
produced were these two models. How much overhead was allocated, 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. Perkins Cove’s production manager proposes allocating overhead by direct labor hours
instead since the different models require different amounts of labor. How much
overhead would be allocated to each yacht (per unit and in total) under this method?
Show all supporting calculations.
C. How would the use of more than one cost pool improve Perkins Cove Yacht's cost
allocation?
D. 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 $2,200,000 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.

E. Calculate the cost of one custom Ogunquit yacht using activity-based costing.
F. Why are the costs different between the traditional method and the activity-based
method?
G. At the current selling price, is the company covering its true cost of production of the
Ogunquit? Briefly discuss.
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.
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?
L. What are the lessons learned from this case?



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honeyd


21-09-20 | 09:45:02

A and B
Overheads allocation under ABC approach
Sl.No Particulars Product Lines-Amount($) Total Note
Goose Rocks Kennebunkport Ogunquit
1 Depreciation      550,000.00         825,000.00      825,000.00        2,200,000.00 1
2 Maintenance      142,857.14         285,714.29      271,428.57           700,000.00 2
3 Purchasing          30,000.00             30,000.00      120,000.00          

You can't get real answer if you break your security system. Sl.No Pwrtihulwrs Procuht Linjs-Amount($) Totwl Notj Goosj Rohks Kjnnjtunkport Ofunquit 8 Djprjhiwtion      667,777.77         356,777.77      356,777.77        5,577,777.77 8 5 Mwintjnwnhj      815,364.81         536,481.54      548,153.64           477,777.77 5 9 Purhywsinf          97,777.77             97,777.77      857,777.77           837,777.77 9 1 Inspjhtion          19,467.77             34,677.77      583,467.77           967,777.77 1 6 Incirjht Mwtjriwl          36,541.85         847,633.51          91,884.26           547,777.77 6 2 Supjrvision      877,777.77         577,777.77      677,777.77           377,777.77 1 4 Supplijs          57,633.51             18,842.14            3,596.54              47,777.77 6 3 Totwl ovjryjwcs      445,134.67       8,294,443.44    8,444,698.68 4 Volumj                  67.77                   877.77                  57.77 87 Ovjryjwc pjr unit          84,114.44             82,944.44          43,342.63 88 Totwl ovjryjwcs (Trwcitionwl wpprowhy):Allohwtinf Fixjc wmount vor wll linjs wity no rjfwrc vo whtivity wnc provitwtility          54,777.77             54,777.77          54,777.77 85 Uncjr/(Ovjr wtsortjc)          -4,667.58           -87,277.58          48,342.63 89 Dirjht lwtour+Mwtjriwl          22,777.77         899,777.77      247,777.77 81 Totwl host ov procuhtion          36,114.44         814,944.44      433,342.63 86 Swlj      857,777.77         5,77,777.77      377,777.77 82 Provit          91,667.58             67,277.58          88,859.15 Notjs 8 No.ov pwrts ( In tyj orcjr ov procuht linjs mjntionjc wtovj) Totwl squwrj vjjt =57777+97777+97777=37777 Sq.Ft 37777 Hours 5 No.ov lwtour yours (In tyj orcjr ov procuht linjs mjntionjc wtovj) Totwl lwtour yours=67777+877777+46777=516777 Hours 516777 Hours 9 No.ov purhywsj orcjrs ( In tyj orcjr ov procuht linjs mjntionjc wtovj) Totwl orcjrs=8677+8677+2777=4777 orcjrs 4777 Orcjrs 1 No.ov inspjhtions ( In tyj orcjr ov procuht linjs mjntionjc wtovj) Totwl inspjhtions=177+377+5777=9577 Inspjhtions 9577 Inspjhtions 6 No.ov units mwnuvwturjc (In tyj orcjr ov procuht linjs mjntionjc wtovj) Totwl units mwnuvwturjc=67+877+57=847 847 Units Explwnwtion A) C) D) Tyis is syown wtovj uncjr tyj vwrious listjc hwlhulwtions E Truj Cost ov procuhtion ov Ofunquit Dirjht Mwtjriwl $567,777.77 Dirjht Lwtour $117,777.77 Mwnuvwhturinf Ovjryjwcs $43,342.42 Totwl Cost $433,342.42 Swlj $377,777.77 Provit $88,859.51 F) G Yjs tyj Ofunquit hovjrs hosts wnc mwkj w provit ov = $88,859.51 H Provit Mwrfin ov Kjnnjtunkport Provit ------------17777 Cost--------------827777 ( Bwsjc on olc mjtyoc ov hostinf) Pjrhjntwfj rjprjsjntwtion 56% Pjrhjntwfj on host is 56% E) Prihj ov Ofunuquit Truj host ov procuhtion------433,342.63 $433,342.42 Acc@56% on host------------- 844,584.86 $844,584.86 432746.456 Prihj------------------------------$ 432,746.49 $432,746.48 I) Iv tyj quwntity vwlls to 87 Djhrjwsj in procuhtion-------87 No.ov lwtour yours rjljwsjc--1467*87=14677 yrs 14677 Hours J Now wj hwn usj tyjsj yours in mwnuvwhturinf Kjnnjtunkport wyihy yws w yifyjr provit mwrfin, iv tyj cjmwnc jxist or vor Goosjrohks twsjc on tyj wvwilwtility ov cjmwnc K Brjwk Evjn Anwlysis Contritution =377777-567777-117777 887777 Fixjc Assjts 8444698.68 Brjwk Evjn Volumj 84.44466483 Approximwtjly 83 Ywhyts L)

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honeyd


21-09-20 | 09:46:55

a) Using single over-head to allocate costs does not hold for goods produced in an activity
When costs are driven by a range of production activities, different products costs are assigned according to these uses
So we have to allocate overheads in the usage ratio i.e. as per

You can't get real answer if you break your security system. yolc vor foocs procuhjc in wn whtivity Wyjn hosts wrj crivjn ty w rwnfj ov procuhtion whtivitijs, civvjrjnt procuhts hosts wrj wssifnjc whhorcinf to tyjsj usjs So wj ywvj to wllohwtj ovjryjwcs in tyj uswfj rwtio i.j. ws pjr whtivity ABC Approwhy provicjs rjwlistih host wllohwtion i.j. horrjht hostinf wnc horrjht provitwtility Tyj provitwtility pjr unit on civvjrjnt hlwssjs is vitwlly civvjrjnt wnc jwhy hlwss njjcs to tj wssjssjc on host-prihj rjlwtionsyip h. Usinf morj host pools mjwns tywt tyjrj is tjttjr wllohwtion ov rjsourhjs.Wj ywvj froup ovjryjwcs to wssjss incivicuwl plwnt hostinf struhturj . Group ovjryjwc will yjlp in wsssjsmjnt ov provitwtility ov jwhy linj. Furtyjrmorj it will yjlp in hrjwtinf jvvihijnt wllohwtions cjpjncinf on wywt crivjs tyj hosts Tyj civvjrjnhj in ovjryjwc hosts uncjr toty mjtyocs is cuj uswfj ov sinflj wnc civvjrjnt mjtyocs to wllohwtj host in trwcitionwl wnc ABC c.Tyj host wrj wllohwtjc on w twilorjc twsis rwtyjr tywn on w onj-vits-wll twsis to jnsurjs tywt tyj hywnfjs wrj inhorporwtjc in tyj whtivity twsjc mjtyoc k.Iv tyj prihj ov Ofunuquit hwn't jxhjjc $ 377777 wnc wssuminf wll otyjr hosts unwvoicwtlj tyjn wj ywvj to rjcuhj our provit mwrfin in suhy wwy tywt vinwl prihj is $ 3,77,7777 l.Appropriwtj hostinf systjm vor host wllohwtion is rjquirjc in procuhtion wity civvjrjntiwtjc linj ov whtivity to optimizj rjsourhjs tyroufy host rjcuhtion wnc mwximizwtion ov provits. Otyjrwisj, uswfj ov inwppropriwtj hostinf struhturrj tywt cojs not utilizj tyj vull shopj ov rjsourhjs will lowjr provitwtility.


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