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Thomas Tables Ltd. makes fashionable handcrafted dining tables. The bottleneck in the production process is in...

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?

Should Thomas hire the nearby woodworking company?

Solutions

Expert Solution

Thomas Tables Ltd.
Workings for answer 1 Ornate Classic Modern Note
Selling price per unit 2,000.00 1,900.00 2,200.00 A
Variable cost per unit 1,200.00 1,000.00 1,200.00 B
Contribution per unit ($)      800.00      900.00 1,000.00 C=A-B
Carving shop time required to produce one unit           8.00          5.00           5.00 D
Contribution margin per hour ($)      100.00      180.00       200.00 E=C/D
Answer 1
If extra time would be used to produce Ornate Tables, then additional premium the company should be willing to pay per hour will be contribution per hour of Ornate i.e. $ 100 per hour.
Answer 2 Amount $
Contribution margin per hour of Modern      200.00
Less: Labor cost per hour to craftsmen      130.00
Additional contribution margin per hour         70.00

ekkarill92 answered 1 year ago
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