Question

1.)

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 constriant) in the production process is upholstery labor-hours. Information concerning three of Portsmouth's upholstered chairs appears below Reclinerll SotaLove Seat/ Selling price per unit Variable cost per unit Upholstery labor-hours per unit 1,262$1,865 380 900 7 hours 13 hours 6 hours 800 1,150 Required 1. Portsmouth is considering paying its upholstery laborers additional compensation 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 $52 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?

2.)

Answer 1

Solution 1- 1:

Selling price of sofa = $1,865

Variable cost per unit of Sofa = $1,150

Contribution per unit of Sofa = $1,865 - $1,150 = $715

Time required to produce one unit of Sofa = 13 hours

Contribution per hour of Sofa = 715/13 = $55/Hour

If upholstery shops keep open after normal working hours, we can pay maximum overtime premium of $55 per hour that will result in no profit no loss.

Solution 1– 2:

Selling price per unit of love seat = $1,380

Variable cost per unit of love seat = $900

Contribution per unit of love seat = $1,380 - $900 = $480

Time required to produce one unit of love seat = 6 hours

Contribution per hour of love seat = 480/6 = $80/Hour

If job will be given to upholstering company then charges payable = $52/hour

Additional contribution margin per hour if we hire upholstering company to upholster the love seat = $80 - $52 = $28/Hour

Solution 1– 3:

As Portsmouth is earning additional contribution of $28/hour by hiring nearby company; therefore it should hire nearby upholster company.

Solution 2-1:

Financial advantage (disadvantage) to determine which product to be sold at split off and which is to be further processed - Dorsey Company
Particulars	Product A	Product B	Product C
Selling price after further processing	$32.80	$27.80	$41.80
Selling price at split off point	$27.00	$21.00	$33.00
Increment revenue per pound or gallon	$5.80	$6.80	$8.80
Total quarterly output in pound or gallon	14400	22400	5600
Total Incremental Revenue	$83,520.00	$152,320.00	$49,280.00
Total incremental processing cost	$89,220.00	$129,170.00	$60,160.00
Financial advantage (disadvantage) of further processing	-$5,700.00	$23,150.00	-$10,880.00

Solution 2-2:

Product A and C to be sold at split off point and product B to be sold after further processing.