Portsmouth Company makes fine colonial reproduction furniture. Upholstered furni

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:

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 $40 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?

Recliner Sofa Love Seat Selling price per unit $ 1,120 $ 1,645 $ 1,460 Variable cost per unit $ 700 $ 1,150 $ 950 Upholstery shop time required to produce one unit 7 hours 11 hours 6 hours

Explanation / Answer

Part 1 - Calculation of premium payable can be calculated by calculating the contribution margin per unit of constained resources

Part 2 - For deciding on proposal, Calculate the contribution margin per unit of contrained resource

Portsmouth will earn the additional contribution of $45 per hour ($85 - $40) on accepting the offer for loveseats.

The extra time can be used to upholster love seats which would give $45 per hour assuming the loveseats are already up to demand

Part 3 - Yes, Offer of Nearby upholstering company should be accepted at $40 per hour.

Particulars Sales price per unit $1645 Less : Variable cost per unit $1150 Contribution per unit $495 Upholstery shop time required to produce one unit 11 hours Contribution margin per unit of constrained resource $45 Company can pay upto $45 per hour

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