Portsmouth Company makes fine colonial reproduction furniture. Upholstered furni
ID: 2560633 • 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. The company's only variable cost is direct materials. Information concerning three of the company's upholstered chairs appears below: Selling price per unit Variable cost per unit Upholstery shop time required to produce one unit Recliner Sofa Love Seat $ 1,086 1,850 $ 1,390 850 6 hours 750 $1,350 $ 6 hours 10 hours Required: 1. 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 in terms of an overtime premium per hour 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 fixed charge of $47 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? Complete this question by entering your answers in the tabs below Required 1 Required 2Required 3 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 in terms of an overtime premium per hour to keep the upholstery shop open after normal working hours? Maximum overtime premium per hourExplanation / Answer
1) As the extra time is used to produce sofas, the maximum overtime premium per hour can be upto Contribution margin per hour from Sofa which is calculated as follows:-
The maximum overtime premium per hor to keep the Upholstery shop open after the normal working hours is $50 per hour
2) If the company hires the nearby company for producing love seat then that time can be utilised for the production of other chair that gives highest contribution per hour. Therefore, firstly we need to calculate contribution per hour from all the three products which is shoen as follows:-
After the Love seat, Recliner's contribution per hour is higher(i.e.$56 per hour). Thus the company should used the time saved for the production of Recliner which will result in additional contribution per hour of $9 per hour (i.e. $56-$47)
Therefore Portsmouth can earn additional contribution margin per hour of $9 if it hires the nearby Upholstering company to make loveseats.
3) As shown in the above part 2, the contribution per hour of all the three products is higher than fixed charge of $47 per hour, Portsmouth should hire the nearby upholstering company.
Selling Price per Unit $1,850 Less: Variable Cost per unit ($1,350) Contribution margin per unit (A) $500 Upholstery Shop time required to produce one unit (B) 10 hours Contribution margin per hour (A/B) $50 per hour