In: Accounting
Portsmouth Company makes fine colonial reproduction furniture. Upholstered furniture is one of its major product lines and the bottleneck on this production line is time in the upholstery shop. Upholstering is a craft that takes years of experience to master and the demand for upholstered furniture far exceeds the company’s capacity in the upholstering shop. Information concerning three of the company’s upholstered chairs appears below:
Recliner | Sofa | Love Seat | ||||
Selling price per unit | $1,314 | $1,650 | $1,290 | |||
Variable cost per unit | $850 | $1,100 | $950 | |||
Upholstery shop time required to produce one unit | 8 hours | 10 hours | 4 hours | |||
Required:
1. More time could be made available in the upholstery shop by asking the employees who work in this shop to work overtime. Assuming that this extra time would be used to produce sofas, up to how much should the company be willing to pay per hour 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 fixed charge of $50 per hour. The management of Portsmouth is confident that this upholstering company’s work is high quality and their craftsmen should be able to work about as quickly as Portsmouth's own craftsmen on the simpler upholstering jobs such as the love seat. Should management accept this offer?
Yes | |
No |
1.To answer this sub part we need to know the contribution per hour of upholstery shop time for sofas.
contribution per unit of sofas = $1,650 -$1,100 =>$550.
contribution per hour of upholstery time of sofa => contribution per unit / upholtery hours to produce one unit
=>$550 / 10 hours
=>$55.
So the company can pay $55 per hour to the employees who work overtime to produce sofas.
2.we need to know the contribution margin per hour of all the three products now.
recliner | sofa | love seat | |
selling price per unit | 1,314 | 1,650 | 1,290 |
less:variable cost per unit | 850 | 1100 | 950 |
contribution margin per unit | 464 | 550 | 340 |
upholstery shop time | 8 hours | 10 hours | 4 hours |
contribution per upholstery shop hour(=> contribution / shop time) | 464 /8 =>58 | 550/10=>55 | 340/4=>85 |
Should management accept this offer?
YES.
Since the contribution per upholstery shop hour for all the three products is greater than the fixed charge of $50 per hour made by nearby upholstery company, management can accept the offer made by that company, not only for producing love seat but also recliners and sofas.