Question

Thomas Tables Ltd. makes fashionable handcrafted dining tables. The bottleneck in the production process is in the carving shop. Carving the tables is a craft that takes years of experience to master. Demand for these handcrafted tables exceeds the company’s capacity. Information concerning the company’s three product lines appears below:

	Ornate Table	Classic Table	Modern Table
Selling price per unit	$2,000	$1,900	$2,200
Variable cost per unit	$1,200	$1,000	$1,200
Carving shop time required to produce one unit	8 hours	5 hours	5 hours

Required:

1.More time could be made available in the carving shop by asking the employees who work in this shop to work overtime. Assuming that this extra time would be used to produce Ornate Tables, up to how much a premium should the company be willing to pay per hour to keep the carving shop open after normal working hours? 2.A small nearby woodworking company has offered to carve furniture for Thomas at a fixed charge of $130 per hour. The management of Thomas is confident that this company’s work is high quality and their craftsmen can work as quickly as Thomas’s own craftsmen on the simpler carving jobs such as the Modern Table. How much additional contribution margin per hour can Thomas earn if it hires the nearby woodworking company to make Modern Tables? 3.Should Thomas hire the nearby woodworking company?

Answer 1

Calculation

	Ornate Table	Classic Table	Modern Table
Selling price per unit	$            2,000	$            1,900	$            2,200
Less: variable cost per unit	$            1,200	$            1,000	$            1,200
Contribution margin per unit	$                800	$                900	$            1,000
Divided by : labor hours per unit	8	5	5
Contribution margin per hour	$                100	$                180	$                200

Answer

Answer 1	Maximum Overtime premium per hour company willing to pay for production of sofa (Hint: Contribution margin per hour for Ornate Tables)			$                100
	Contribution margin per hour for Modern Table			$                200
	Less: Hire charge paid per hour			$                130
Answer 2	Additional Contribution margin per hour			$                  70
Answer 3	Thomas should hire the nearby wood working company. [By hiring them, company will earn additional $70 contribution per hour.]			Yes