Question

Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the company's products far exceeds its manufacturing capacity. The bottleneck (or constraint) in the production process is upholstery labor-hours. Information concerning three of Portsmouth's upholstered chairs appears below:

	Recliner			Sofa			Love Seat
Selling price per unit	$	1,390		$	1,600		$	1,425
Variable cost per unit	$	900		$	1,150		$	1,050
Upholstery labor-hours per unit	7 hours			10 hours			5 hours

Questions

1. Portsmouth is considering paying its upholstery laborers hourly compensation, in addition to their usual salaries, to work overtime. Assuming that this extra time would be used to produce sofas, up to how much of an overtime premium per hour should the company be willing to pay 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 price of $42 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 if it hires the nearby upholstering company to make Love Seats?

3. Should Portsmouth hire the nearby upholstering company?

Answer 1

1.- For sofa it can pay at most $45 per hours

2.- $33 per hours

3.- It should. It will create additional gains.

Explanation:

	Recliner	Sofa	Love seat
Sales	$1390	$1600	$1425
Variable	$900	$1150	$1050
Contribution	$490	$450	$375
Labor Hours	7	10	5
Contribution per hour	$70	$45	$75

1.- Contribution per hour $45 for SOFA

it can pay up to this amount.

2.-contribution per hour - labor cost per hour = net

$75 -$42 = $33 Contribution Margin per hour

3.-It should hire it. t is generating additional profit.