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. Selling price per unit Variable cost per unit Upholstery labor-hours per unit Recliner Sofa Love Seat $ 1,368 $ 1,660 $ 1,320 $ 999 $ 1,100 $ 1,600 9 hours 14 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? ? A small nearby upholstering company has offered to upholster furniture for Portsmouth at a price of $36 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 eam 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. Red Red

Answer 1

ANSWER

(1)The maximum that portsmouth can pay to laborers

	sofas
selling price per unit	1660
variable cost per unit	(1100)
total maximum overtime premium portsmouth can pay	560
Hours required to produce one unit	14
maximum overtime premium portsmouth can pay per hour[560/14]	$40

(2)contribution margin = selling price- variable cost

	Love seats
selling price	1320
Variable cost	(1000)
Less: cost of buying from upholstery [$36 per hour *4 hours]	(144)
contribution margin per unit	176
Hours per unit	4
Contribution margin per hour	$44

if portsmouth hire upholstery there would be an additional contribution margin per hour of love seats of $44.

If love seats are produced upto demand than the freed up capacity of outsourcing love seats will be used to produce sofa or recliner.

Both of which are having contribution margin higher than $36 per hour.

	Recliner	sofa
contribution margin	468	560
constrained hour per unit	9	14
contribution margin per constrain (labor hours)	$52	$40

(3)yes.. portsmouth should hire upholstery .

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