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 chalrs appears below. Selling price per unit Variable cost per unit Upholstery labor-hours per unit $ $ Recliner 1,498 800 8 hours $ $ Sofa Love Seat 1,800 $ 1,500 1,200 $ 1,200 10 hours 5 hours Required: 1. Portsmouth is considering paying its upholstery laborers hourly compensation, in addition to their usual salarles, to work overtime. Assuming that this extra time would be used to produce sofas, up to how much of an overtime premlum 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 $45 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 provides the raw materials to the nearby company and then hires It to upholster the Love Seats? 3. Should Portsmouth hire the nearby upholstering company? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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? Maximum overtime premium per hour

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	$	1,400		$	1,800		$	1,500
Variable cost per unit	$	800		$	1,200		$	1,000
Upholstery labor-hours per unit	8 hours			10 hours			5 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 $45 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 provides the raw materials to the nearby company and then hires it to upholster the Love Seats?

3. Should Portsmouth hire the nearby upholstering company?

Answer 1

1)

	Sofas
Sales price per unit	$1800
Less: Variable cost per unit	(1200)
Contribution margin per unit	600
Upholstery labor-hours per unit	10 hours
Maximum overtime premium per hour	(600/10)= $60

2)

	Love Seat
Sales price per unit	$1500
Less: Variable cost per unit	(1000)
Contribution margin per unit	500
Upholstery labor-hours per unit	5 hours
Contribution margin per hour	(500/5)= $100
Less: Purchase price	(45)
Additional contribution margin per hour	$55

3) Yes, Portsmouth should hire the nearby upholstering company. As by hiring the upholstering company the Portsmouth is earning profit.