Portsmouth Company makes fine colonial reproduction furniture. Upholstered furni
ID: 2483351 • 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 $ 1,124 $ 1,890 $ 1,450
Variable cost per unit $ 800 $ 1,350 $ 1,050
Upholstery shop time required to produce one unit 6 hours 12 hours 5 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?
Explanation / Answer
Since the 3 product names are not clearly differenciated, it is assumed that the products are
1. Recliner
2. Sofa
3. Love seat
It is ideal to produce maximum love seats since it has highest contribution per hour.
Contribution per unit of sofa = 540
Number of hours needed for sofa = 12 hours.
Number of love seats that can be made in 12 hours = 12/5 = 2.4
Contribution from 2.4 love seats = 2.4*400 = 960
Differential contribution foregone = 960-540 = 420.
The contribution foregone per hour = 420/12 = 35 per hour.
Since contribution foregone is an oppurtunity cost, it is assumed thatthe cost is recovered from sales, the maximum premium that can be goven to overtime is 35 per hour. The revised sales price per sofa will b e 1890 + (35*12) = 2310. Variable cost will be 1350 + overtime cost (35*12) = 1770. The contribution per unit will be 2310-1770 = 540 per unit.
Note : it is assumed that the price per unit has inelastic demand.
Recliner Sofa Love Seat Sale Price 1124 1890 1450 Variable Cost 800 1350 1050 Contribution per unit 324 540 400 Time required in Upholystery shop (hours) 6 12 5 Contribution per upholstery hour 54 45 80