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: Recliner Sofa Love Seat Selling price per unit $ 1,412 $ 1,850 $ 1,325 Variable cost per unit $ 800 $ 1,250 $ 950 Upholstery labor-hours per unit 9 hours 12 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 $47 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 if it hires the nearby upholstering company to make Love Seats? 3. Should Portsmouth hire the nearby upholstering company?

Answer 1

Ans.

Details	Product-1	Product-2	Product-3
Per Unit Selling Price	1412	1850	1325
Variable Cost Per Unit	800	1250	950
Contribution= (Sales-Variable Cost)	612	600	375
Per Unit Required Hours	9	12	5
Per Hours Rates	47	47	47
Labour Cost Per Units	423	564	235
Variable Cost - Labour Cost	377	686	715