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	$	1,180		$	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 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

Solution: 1

Calculation of Overtime Premium per Hour company willing to pay for producing Sofa:

Therefore, the company will be willing to pay $50 overtime premium per hour to keep the shop open after normal working hours for producing Sofa.

Solution: 2

Calculation of Additional Contribution Margin per Hour

Therefore, company can earn $28 additional contribution margin per hour if if it hires the nearby upholstering company to make Love Seats.

Solution: 3

yes, Portsmouth should hire the nearby upholstering company as additional margin earned is positive.