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Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the companys prod

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Answer #1

Solution - 1:
Selling price of sofa = $1,980
Variable cost per unit of Sofa = $1,350
Contribution per unit of Sofa = $1,980 - $1,350 = $630
Time required to produce one unit of Sofa = 14 hours
Contribution per hour of Sofa = 630/14 = $45/Hour
If upholstery shops keep open after normal working hours, we can pay maximum overtime premium of $45 per hour that will result in no profit no loss.


Solution – 2:
Selling price per unit of love seat = $1,540
Variable cost per unit of love seat = $1200
Contribution per unit of love seat = $1,540 - $1200 = $340
Time required to produce one unit of love seat = 4 hours
Contribution per hour of love seat = 340/4 = $85/Hour
If job will be given to upholstering company then charges payable = $40/hour
Additional contribution margin per hour if we hire upholstering company to upholster the love seat = $85 - $40 = $45/Hour


Solution – 3:
As Portsmouth is earning additional contribution of $45/hour by hiring nearby company; therefore it should hire nearby upholster company.

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