Portsmouth Company makes fine colonial reproduction furniture. Upholstered furni
ID: 2460698 • Letter: P
Question
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 $ 1,112 $ 1,750 $ 1,120 Variable cost per unit $ 800 $ 1,200 $ 800 Upholstery shop time required to produce one unit 6 hours 11 hours 4 hours Required: 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 of a premium should the company be willing to pay per hour to keep the upholstery shop open after normal working hours? Maximum amount payable per hour A small nearby upholstering company has offered to upholster furniture for Portsmouth at a fixed charge of $46 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 NoExplanation / Answer
Recliner Sofa Love Seat Selling price per unit 1112 1750 1120 Variable cost per unit 800 1200 800 Contribution per unit 312 550 320 Shop time required 6 11 4 Contribution per hour 52 50 80 1) Maximum amount payable per hour = contribution per hour for sofa = $ 50 2) Yes , Portsmouth should accept the offer at $ 46 , because it would still leave qas $ 50 and this value is below the maximum value payable per hour