Question

In: Accounting

Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the...

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:

Recliner Sofa Love Seat
Selling price per unit $ 1,426 $ 1,690 $ 1,310
Variable cost per unit $ 850 $ 1,250 $ 950
Upholstery labor-hours per unit 9 hours 11 hours 4 hours

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 $37 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?

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?

Maximum overtime premium per hour

Required 2

A small nearby upholstering company has offered to upholster furniture for Portsmouth at a fixed charge of $37 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?

Show less

Additional contribution margin per hour

Required 3

Should Portsmouth hire the nearby upholstering company?

Yes or No?

Solutions

Expert Solution

Requirement (1)- Maximum overtime premium per hour

SOFA - Selling price per unit = $1,690

Less: SOFA - Variable cost per unit = $1,250

SOFA - Contribution margin per unit = $440

Upholstery shop time required to produce one unit = 11 Hours

Contribution margin per unit of the constrained resource = $440 / 11Hrs = $40 per hour

“Therefore, Maximum overtime premium per hour = $40 per hour”

Requirement(2)- Additional contribution margin per hour  

Recliner

Sofa

Love Seat

Selling price per unit     

$1,426

$1,690

$1,310

Variable cost per unit     

$850

$1,250

$950

Contribution per unit     

$576

$440

$360

Upholstery shop time required to produce one unit

9 hours

11 hours

4 hours

Contribution per hour

$64 per hour

$40 per hour

$90 per hour

Additional contribution margin that the Portsmouth can earn = $53 per hour [$90 - $37]

“Additional contribution margin per hour = $53 per hour”

Requirement (3) - Should Portsmouth hire the nearby upholstering company?

“YES”. Since it gives the additional contribution margin of $53 per hour”


Related Solutions

Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the...
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 $ 1,078 $ 2,060 $ 1,525 Variable cost per unit $ 700 $ 1,400 $ 1,100 Upholstery labor-hours per unit 7 hours 12 hours 5 hours Required: 1. Portsmouth...
Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the...
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 $ 1,180 $ 2,000 $ 1,425 Variable cost per unit $ 700 $ 1,350 $ 1,050 Upholstery labor-hours per unit 8 hours 13 hours 5 hours Required: 1. Portsmouth...
Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the...
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 products appears below: Recliner Sofa Love Seat Selling price per unit $ 1,262 $ 1,900 $ 1,250 Variable cost per unit $ 800 $ 1,250 $ 950 Upholstery labor-hours per unit 7 hours 13 hours 4 hours Required: 1. Portsmouth is...
Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the...
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 $ 1,178 $ 1,920 $ 1,150 Variable cost per unit $ 800 $ 1,150 $ 850 Upholstery labor-hours per unit 7 hours 14 hours 4 hours Required: 1. Portsmouth...
Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the...
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 $ 1,112 $ 1,590 $ 1,350 Variable cost per unit $ 800 $ 1,150 $ 1,000 Upholstery labor-hours per unit 6 hours 11 hours 5 hours Required: 1. Portsmouth...
Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the...
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: Recliner Sofa Love Seat Selling price per unit $ 1,320 $ 1,960 $ 1,450 Variable cost per unit $ 800 $ 1,300 $ 1,050 Upholstery labor-hours per unit 10 hours 12 hours 5 hours Required: 1. Portsmouth...
Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the...
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: Recliner Sofa Love Seat   Selling price per unit $ 1,270    $ 1,980    $ 1,350      Variable cost per unit $ 850    $ 1,200    $ 1,000      Upholstery labor-hours per unit 7 hours   ...
Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the...
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 $ 1,206 $ 1,620 $ 1,250 Variable cost per unit $ 800 $ 1,100 $ 800 Upholstery labor-hours per unit 7 hours 13 hours 5 hours Required: 1. Portsmouth...
Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the...
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 $ 1,206 $ 1,620 $ 1,250 Variable cost per unit $ 800 $ 1,100 $ 800 Upholstery labor-hours per unit 7 hours 13 hours 5 hours Required: 1. Portsmouth...
Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the...
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 $ 1,300 $ 1,785 $ 1,190 Variable cost per unit $ 700 $ 1,200 $ 850 Upholstery labor-hours per unit 10 hours 13 hours 4 hours Required: 1. Portsmouth...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT