Portsmouth Company makes upholstered furniture. Its only variable cost is direct
ID: 2521076 • 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: Sofa $1,700 $1,150 Love Seat $1,450 $1,150 4 hours Recliner Selling price per unit Variable cost per unit Upholstery labor-hours per unit $1,286 $800 9 hours 10 hours Required 1. 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 hourExplanation / Answer
Portsmouth Company
Contribution margin per sofa= selling price – variable cost
Selling price per sofa = $1,700
Variable cost per sofa = $1,150
Contribution margin per sofa = $1,700 - $1,150 = $550
Number of labor hours needed per sofa = 10
Contribution margin per labor hour = $550/10 = $55
Hence, the company can pay $55 overtime premium per hour to keep the shop open after normal working hours.
Determination of the amount by which the annual profits increase or decrease if the order is accepted:
Sales price per unit
$18
Direct materials
$1.60
Direct labor
$2.00
variable manufacturing overhead
$0.60
variable selling and administrative expense
$1.50
total variable cost
$5.70
Contribution margin per unit
$12.30
Number of units of special order
2,100
Total contribution
$25,830
Hence, the annual profits would increase by $25,830.
Determination of the relevant cost per unit to establish a minimum selling price of inferior products:
The relevant cost is $1.50 – the variable selling and administrative cost per unit.
Other variable costs – direct materials, direct labor and variable manufacturing overhead costs are already expensed (sunk) as the units are already produced. The fixed costs are period costs and hence not relevant.
Benoit Company
Contribution margin per pound
Product A
$9.33
Product B
$5.83
Product C
$30
Computations –
Product
A
B
C
Contribution margin per unit
$22
$8.75
$13.50
Direct material cost
$16.50
$10.50
$3.15
material cost per pound
$7
$7
$7
pounds per unit
2.36
1.5
0.45
Contribution margin per pound
$9.33
$5.83
$30
Working –
Material (pounds) used per unit = direct material cost per unit/material cost per pound
For instance, pounds per unit for Product A = $16.50/$7 = 2.36 pounds
Contribution margin per pound = contribution margin per unit/pounds per unit
For instance, contribution margin per pound, Product C = $13.50/0.45 = $30 per pound
Sales price per unit
$18
Direct materials
$1.60
Direct labor
$2.00
variable manufacturing overhead
$0.60
variable selling and administrative expense
$1.50
total variable cost
$5.70
Contribution margin per unit
$12.30
Number of units of special order
2,100
Total contribution
$25,830