Question

Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the company's products far exceeds its manufacturing capacity. The bottleneck (or constraint) in the production process is upholstery labor-hours. Information concerning three of Portsmouth's upholstered chairs appears below: Recliner Sofa Love Seat Selling price per unit $ 1,086 $ 1,700 $ 1,420 Variable cost per unit $ 750 $ 1,250 $ 1,100 Upholstery labor-hours per unit 6 hours 10 hours 4 hours Required: 1. Portsmouth is considering paying its upholstery laborers hourly compensation, in addition to their usual salaries, to work overtime. Assuming that this extra time would be used to produce sofas, up to how much of an overtime premium per hour should the company be willing to pay to keep the upholstery shop open after normal working hours? 2. A small nearby upholstering company has offered to upholster furniture for Portsmouth at a price of $39 per hour. The management of Portsmouth is confident that this upholstering company’s work is high quality and their craftsmen can work as quickly as Portsmouth’s own craftsmen on the simpler upholstering jobs such as the Love Seat. How much additional contribution margin per hour can Portsmouth earn if if it hires the nearby upholstering company to make Love Seats? 3. Should Portsmouth hire the nearby upholstering company?

Answer 1

Selling Price Per Unit Variable cost Per Unit Upholstry labor-hour per Unit Recliner Sofa Love Seat 1086) 1700 1420 750 1250 1100 61014 1) Assume Extra Time is used to Produce Sofa Sofa Selling Price Per Unit 1700 Variable cost Per Unit 1250 Contibution Margin Per Unit 450 Labor Hour Per unit 10 contibution Margin Per Hour(450/10) 45 Maximum Over time Premium Per Hours 45 2) Additional Contibution Margin if Lova seats Hire to Upholstring company at a price of $39 Love Seat Selling Price Per Unit 1420 Variable cost Per Unit 1100 Contibution Margin Per Unit 320 Labor Hour Per unit Contibution Margin Per Hour(320/4) 80 Additional Contibution Margin (80-39) 3) Shoud Portmouth Hire the Nearby Uplostering Company YES