[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

$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.


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
D. Perkins Cove Yacht's controller developed the following data for use in activity-based

Amount Cost


Kennebunkport Ogunquit

Depreciation $2,200,000 Square

20,000 30,000 30,000

Maintenance $700,000 Direct

50,000 100,000 95,000

Purchasing $180,000 # of

1,500 1,500 6,000

Inspection $350,000 # of

400 800 2,000


$290,000 Units

50 100 20

Supervision $800,000 # of

400 800 2.000

Supplies $70,000 Units

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
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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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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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

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