Question

Exercise 11-6 Managing a Constrained Resource (LO11-6) 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: Selling price per unit Variable cost per unit Upholstery labor-hours per unit Recliner Sofa Love Seat $ 1,298 $ 1,855 $ 1,280 850 $ 1,250 $ 1.000 7 hours 11 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 $51 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 it hires the nearby upholstering company to make Love Seats? 3. Should Portsmouth hire the nearby upholstering company? Complete this question by entering your answers in the tabs below. Prey 4 of 5 Next >

Answer 1

Resources are finite and therefore, a business has to make important decisions in order to maximise profit. Constrained resources require businesses to make decisions about which products to make and in what quantities. Portsmouth Company Recliner Sofa Love seat 1298 1855 1280 S.P Less:- VC Contribution Margin (a) Constrained resource - Upholstery shop time (b) Contribution Margin per Constrained resouce (a/b) Rank 850 448 1250 605 11 55 III 1000 280 4 70 64 Part 1 The premium that company will be willing to pay for sofas is $ 55 per machine hour Since sofas are providing $ 55 as contribution margin per machine hour. Part 2 (70-51) $ 19(addl. CM per hour) Part 3 Offer should be accepted as there is an incremental benefit of $ 19 per hour.