Portsmouth Company makes upholstered furniture. Its only variable cost is direct
ID: 2508094 • Letter: P
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 constriant) in the production process is upholstery labor-hours. Information concerning three of Portsmouth's upholstered chairs appears below:
Portsmouth is considering paying its upholstery laborers additional compensation 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?
Maximum amount payable per hour :
A small nearby upholstering company has offered to upholster furniture for Portsmouth at a price of $45 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 it provides the raw materials to the nearby company and then hires it to upholster the Love Seats?
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 constriant) in the production process is upholstery labor-hours. Information concerning three of Portsmouth's upholstered chairs appears below:
Explanation / Answer
Details
Particulars
Recliner
Sofa
Love Seat
Explanation
Selling price per unit
1308
1900
1170
Variable cost per unit
900
1300
850
Upholstery labor-hours per unit
6 hours
12 hours
4 hours
SOLUTION
Contribution Per Unit
408
600
320
Contribution Per Unit = Selling Price Per Unit (-) Variable Cost
Part 1.)
Maximum Amount payable per hour for making one unit sofa
50
Maximum Amount = Contribution per Unit / Hours taken per unit i.e. 600/12 = 50
Part 2.)
If hires the nearby firm to do the upholstery job for $45 per hour, the additional contribution that Portsmouth can earn shall be $ (50-45) = $5
5
$50-$45 = $5 per hour, which makes it $60 per unit
Details
Particulars
Recliner
Sofa
Love Seat
Explanation
Selling price per unit
1308
1900
1170
Variable cost per unit
900
1300
850
Upholstery labor-hours per unit
6 hours
12 hours
4 hours
SOLUTION
Contribution Per Unit
408
600
320
Contribution Per Unit = Selling Price Per Unit (-) Variable Cost
Part 1.)
Maximum Amount payable per hour for making one unit sofa
50
Maximum Amount = Contribution per Unit / Hours taken per unit i.e. 600/12 = 50
Part 2.)
If hires the nearby firm to do the upholstery job for $45 per hour, the additional contribution that Portsmouth can earn shall be $ (50-45) = $5
5
$50-$45 = $5 per hour, which makes it $60 per unit