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)

Yacht Goose Rocks Kennebunkport Ogunquit
Selling Price 120,000 200,000 800,000
Traditional Costing:
Prime Cost 66,000 133,000 690,000
Manufacturing OH Cost 27,000 27,000 27,000
Total Per Unit Cost 93,000 160,000 717,000
Profit Per Unit 27,000 40,000 83,000
Profit Margins 0.23 0.20 0.10
Activity Based Costing:
Prime Cost 66,000 133,000 690,000
Manufacturing OH Cost 19,450 16,400 98,877
Total Per Unit Cost 85,450 149,400 788,877
Profit Per Unit 34,550 50,600 11,123
Profit Margins 0.29 0.25 0.01
Difference in per unit cost 7,550 10,600 (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 Margin 25%
Cost of Ogunquit 788,877
Expected Selling Price 988,462

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 Overhead Amount Cost Driver Goose Rocks Kennebunkport Ogunquit Total Cost Per Driver
Depreciation 2,200,000 Square Feet 20,000 30,000 15,000 65,000 34
Maintenance 700,000 Direct Labor Hours 50,000 100,000 47,500 197,500 4
Purchasing 180,000 No. of Purchase Orders 1,500 1,500 3,000 6,000 30
Inspection 350,000 No. of Inspections 400 800 1,000 2,200 159
Indirect Material 290,000 Units Manufactured 50 100 10 160 1,813
Supervision 800,000 No. of Inspections 400 800 1,000 2,200 364
Supplies 70,000 Units Manufactured 50 100 10 160 438
Total 4,590,000


Total Costs of Three Models
Goose Rocks Kennebunkport Ogunquit
Depreciation 676,923 1,015,385 507,692
Maintenance 177,215 354,430 168,354
Purchasing 45,000 45,000 90,000
Inspection 63,636 127,273 159,091
Indirect Material 90,625 181,250 18,125
Supervision 145,455 290,909 363,636
Supplies 21,875 43,750 4,375
Total Costs 1,220,729 2,057,997 1,311,274
Unit Volume 50 100 10
Per Unit Cost 24,415 20,580 131,127
Prime Cost 66,000 133,000 690,000
Total Costs 90,415 153,580 821,127
Profit Per unit 29,585 46,420 167,335
Total Profit 1,479,271 4,642,003 1,673,349
Total Profit Before 1,727,511 5,060,021 222,468


  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 Cost 4,590,000
Ogunquit Gross Profit Margin 110,000
Units to be Sold 42

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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