Portsmouth Company makes fine colonial reproduction furniture. Upholstered furni
ID: 2578194 • 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 $1,200 Selling price per unit Variable cost per unit Upholstery shop time required to $750 9 hours $ 1,750 $ 1,650 $ 1,200 $ 1,200 11 hours 5 hours produce one unit Required: 1. More time could be made available in the upholstery shop by asking thee 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? aximum amount pavable er hour 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 should be able to work about as quickly as Portsmouth's own craftsmen on the simpler upholstering jobs such as the love seat. Should management accept this offer? O NoExplanation / Answer
2.
As the variable cost per hour for Love sofas is $240 and the offer is $47 per hour, the company can accept the offer.
workings:
1 Maximum amount payable per hour $50.00 Since this is the contribution margin per hour for sofa, the company can pay a premium per hour equal to this amount.