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 $45 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 $ 1,250 $ 1,850 $ 1,275 Variable cost per unit $ 750 $ 1,350 $ 900 Upholstery shop time required to produce one unit 10 hours 10 hours 5 hours

Explanation / Answer

Solution - 1:

Selling price of sofa = $1,850

Variable cost per unit of Sofa = $1,350

Contribution per unit of Sofa = $1,850 - $1,350 = $500

Time required to produce one unit of Sofa = 10 hours

Contribution per hour of Sofa = 500/10 = $50/Hour

If upholstery shops keep open after normal working hours, we can pay maximum overtime premium of $50 per hour that will result in no profit no loss.

Solution – 2:

Selling price per unit of love seat = $1,275

Variable cost per unit of love seat = $900

Contribution per unit of love seat = $1,275 - $900 = $375

Time required to produce one unit of love seat = 5 hours

Contribution per hour of love seat = 375/5 = $75/Hour

If job will be given to upholstering company then charges payable = $45/hour

Additional contribution margin per hour if we hire upholstering company to upholster the love seat = $75 - $45 = $30/Hour

Solution – 3:

As Portsmouth is earning additional contribution of $30/hour by hiring nearby company; therefore it should hire nearby upholster company.

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