Portsmouth Company makes upholstered furniture. Its only variable cost is direct
ID: 2548886 • 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: Recliner Sofa Love Seat Selling price per unit $ 1,200 $ 1,905 $ 1,400 Variable cost per unit $ 750 $ 1,300 $ 1,000 Upholstery labor-hours per unit 9 hours 11 hours 5 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? 2. A small nearby upholstering company has offered to upholster furniture for Portsmouth at a price of $52 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? 3. Should Portsmouth hire the nearby upholstering company?
Explanation / Answer
Req 1: Recycliner Sofa Love Seat Selling price 1200 1905 1400 Variable cost 750 1300 1000 Contribution margin per unt 450 605 400 Upholster labour hour per unit 9 11 5 Contrirbution margin per hour 50 55 80 The company will be ready to give overtime premium of $ 55 per hour for making the sofa. Overtime premium is an addiitional amount over and above the normal wages which should not excess the earning made per hour i.e. contribution margin of Sofa per hour Req 2: Contribution margin of Loveseta being outtsourced: Selling price per unit 1400 Less: variable cost Material 1000 Upholstery contractual payment per hour (5 hours @52) 260 Contribution margin per unit earned. 140 As the firm is earning the additional margin of $140 per unit after contract. It should be outsourced.