Portsmouth Company makes fine colonial reproduction furniture. Upholstered furni
ID: 2601558 • 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: Recliner Sofa Love Seat Selling price per unit $ 1,178 $ 1,850 $ 1,425 Variable cost per unit $ 800 $ 1,250 $ 1,000 Upholstery shop time required to produce one unit 7 hours 12 hours 5 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?
Explanation / Answer
WORKSHEET: Recliner Sofa Love Seat Selling price per unit $ 1,178 $ 1,850 $ 1,425 Variable cost per unit $ 800 $ 1,250 $ 1,000 Contribution per unit $ 378 $ 600 $ 425 Upholstery shop time per unit (hours) 7 12 5 Contribution per hour of shop time $ 54 $ 50 $ 85 a) The maximum premium that can be paid for 1 hour of shop time is the contribution per shop hour of the SOFA, which is = $ 50 b) Engaging the outside firm for love seats will help in gaining additional contribution margin of $85-$47 = $38 per hour hired, as it will release production time within on which more Love seats could be produced, if the demand can absorb the addit- ional production. If love seats are already produced upto the maximum demand for it, then the released hours by entrusting Love seat to the outside firm, will release shop time which can be used to earn additional contribution on the other products--$7 per hour on recliner and $3 per hour on Sofa. c) Yes, Portsmouth should hire the nearby upholstery, as additional contribution per hour would be gained.