Drag your adult villager to the whale bones. He/she will take a whale bone to the construction table.
By common sense, drag an adult villager to the construction table. He/she will make a pickaxe out of the whale bones. The pickaxe will be near the anvil.
Drag an adult villager to the pickaxe and he/she will chop the wood that is behind the crafting hut.
Drag an adult villager who is a scientist (it will be written if he/she is a trainee, adept or master scientist) to the science board beside the research table. He/she will draw up plans.
Drag adult villagers to the crafting hut to complete repairs.
The crafting hut can now be used! Use it to generate new resources to solve the next puzzles. View the crafting and resources guide here.
Note: You could complete repairs for the crafting hut before chopping the wood, but you would not be able to craft until the puzzle is complete.
The blue-faced villager will pop out of nowhere to guide you in crafting.
Drag an adult villager to the crafting hut and take the oil. The villager will bring the oil to the Kraken statue.
Also check out my video for Puzzle 3!