Question

EXERCISE 12-6 Managing a Constrained Resource LO12-6 Portsmouth Company makes fine colonial reproduction furniture. Upholstered furniture is one of its major product lines and the bottleneck on this production line is time in the upholstery shop Upholstering is a craft that takes years of experience to master and the demand for upholstered fur- niture far exceeds the company's capacity in the uphol stering shop. Information concerning three of the company's upholstered chairs appears below Recliner Sofa Love Seat $1,400 $1,800 $1,500 $800 $1,200 $1,000 5 hours Selling price per unit Variable cost per unit Upholstery shop time required to produce one unit . 8 hours10 hours Differential Analysis: The Key to Decision Making Required: More time could be made available in the upholstery shop by asking the employees who work in this shop to work overtime. Assuming that this extra time would be used to produce sofas, up to how much of a premium should the company be willing to pay in terms of an overtime premium per hour to keep the upholstery shop open after normal working hours? A small nearby upholstering company has offered to upholster furniture for Portsmouth at a fixed charge of $45 perhour. 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 it hires the nearby uphol 2. stering company to make Love Seats? . Should Portsmouth hire the nearby upholstering company? Explain.

Answer 1

			Recliner	Sofa	love set
Selling price per unit			1,400	1,800	1,500
Variable cost per unit			800	1,200	1,000
contribution margin per unit			600	600	500
upholstery labor hours per unit			8	10	5
contribution per labor hour			75	60	100
Required 1
Maximum overtime premium per hour				60
Required 2
net gain		100-45
		55	addittional contribution per hr
Required 3
yes