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 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 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 $53 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?

Solutions

Expert Solution

1 Maximum overtime premium per hour = $          55
Workings:
Sofa:
Selling price per unit = $    1,920
Less: Variable cost per unit = $    1,150
(a) Contribution per unit = $        770
(b) Time required per sofa = 14 hours
(a) / (b) Maximum overtime premium per hour = $          55 per hour
2 Additional contribution margin per hour = $          22
Workings:
Love seat:
Selling price per unit = $    1,150
Less: Variable cost per unit = $        850
(a) Contribution per unit = $        300
(b) Time required per Love seat = 4 hours
(a) / (b) Contribution margin per hour = $          75 per hour
Less: Fixed charge = $          53
Additional Contribution margin per hour = $          22
3 Yes
As above calculated under point 2 Additional Contribution margin per
hour is positive, Therefore it is beneficial to accept the offer

If it is helpful, please rate the answer and if any doubt arises let me know


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 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...
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 $ 1,112 $ 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