The Perkins Cove Yacht Company Case Harvard Case Solution & Analysis

The Perkins Cove Yacht Company Case Case Solution

Difference in Cost in Both Methods (Traditional & ABC):

As we can see in below mentioned table, there are the differences in the total costs of three different yacht models between two methods of costing (Traditional Costing & Activity Based Costing)

YachtGoose RocksKennebunkportOgunquit
Selling Price120,000200,000800,000
Traditional Costing:
Prime Cost66,000133,000690,000
Manufacturing OH Cost27,00027,00027,000
Total Per Unit Cost93,000160,000717,000
Profit Per Unit27,00040,00083,000
Profit Margins0.230.200.10
Activity Based Costing:
Prime Cost66,000133,000690,000
Manufacturing OH Cost19,45016,40098,877
Total Per Unit Cost85,450149,400788,877
Profit Per Unit34,55050,60011,123
Profit Margins0.290.250.01
Difference in per unit cost7,55010,600(71,877)

The costs are different in both methods because in traditional method of costing, the cost driver is one for all the manufacturing overhead costs for three yacht models but in activity based costing Perkins Cove has different cost drivers for different manufacturing overhead costs for three yacht models. That is the main reason for difference in costs in both costing methods because every yacht model has different number of cost drivers that leads to the different costs in both costing methods.

  1. Covering the True Cost of Production for Ogunquit:

At the current selling price $800,000, Perkins Cove is covering its true cost of production for Ogunquit because by activity based costing, the total production cost of Ogunquit is $788,877, at that level Perkins Cove is making the profit of $11,123 (which is almost 1.5% of selling price $800,000).

  1. Expected Price of Ogunquit:

The expected price should be $988,462 for Ogunquit to get the profit margin same as the Perkins Cove Yacht Model Kennebunkport is getting.

Selling price for Ogunquit with same profit margin of Kennebunkport
Kennebunkport Profit Margin25%
Cost of Ogunquit788,877
Expected Selling Price988,462

At new price of Ogunquit the Quantity sold will fall to 10:

At the new price level of Ogunquit, the quantity of Ogunquit sale will fall to 10 per year from 20 per year. In this case Perkins Cove needs to do nothing because at this level, the profit will be higher than previous year when Ogunquit quantity sold to 20 yacht per year. We can see the Perkins Cove Yacht Company overall profit for previous year and next year in the tables below:

Manufacturing OverheadAmountCost DriverGoose RocksKennebunkportOgunquitTotalCost Per Driver
Depreciation2,200,000Square Feet20,00030,00015,00065,00034
Maintenance700,000Direct Labor Hours50,000100,00047,500197,5004
Purchasing180,000No. of Purchase Orders1,5001,5003,0006,00030
Inspection350,000No. of Inspections4008001,0002,200159
Indirect Material290,000Units Manufactured50100101601,813
Supervision800,000No. of Inspections4008001,0002,200364
Supplies70,000Units Manufactured5010010160438
Total4,590,000

 

Total Costs of Three Models
Goose RocksKennebunkportOgunquit
Depreciation676,9231,015,385507,692
Maintenance177,215354,430168,354
Purchasing45,00045,00090,000
Inspection63,636127,273159,091
Indirect Material90,625181,25018,125
Supervision145,455290,909363,636
Supplies21,87543,7504,375
Total Costs1,220,7292,057,9971,311,274
Unit Volume5010010
Per Unit Cost24,41520,580131,127
Prime Cost66,000133,000690,000
Total Costs90,415153,580821,127
Profit Per unit29,58546,420167,335
Total Profit1,479,2714,642,0031,673,349
Total Profit Before1,727,5115,060,021222,468

 

  1. Situation when Ogunquit Price do not Exceed to $800,000:

There are two situations, if Perkins Cove overcome these two situations then it can reduce Ogunquit per unit cost which would result in Perkin Cove not increasing the selling price for Ogunquit because Ogunquit will fulfill its role in Perkins Cove overall profit margins.

If Perkins Cove reduces the number of inspections for Ogunquit along with the reductions in number of purchase orders, this will lead to reduction in per unit cost of Ogunquit resulting much more profit margin per unit received from Ogunquit than existing at same price level of $800,000.

  1. Break even Unit Volume for Ogunquit:

At the selling price of $800,000 each, the break even unit volume for Ogunquit will be 42 yacht of Ogunquit. In other words, if Perkins Cove sells 42 unit or yacht of Ogunquit at the selling price of $800,000 each, it will not earn or lose any profit (breakeven point). The calculations of break-even point are mentioned in the table below:

Breakeven Level for Ogunquit:
Total Fixed Cost4,590,000
Ogunquit Gross Profit Margin110,000
Units to be Sold42

Learnings from this Case:

The main lesson I have learned from this case is, if we have different types of products which requires different number of bases for distribution of costs then we cannot distribute this cost to all of our products by using the one same base for all products.

Second lesson I have learned from this case is, the proper allocation of costs. If we assign the cost to that product from which it was related than we can easily find out that what products contribute in profits and which ones are losing or even overlapping or consuming the profits of other products..............

 

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