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
Selling price per unit	$	1,400	$	1,800	$	1,500
Variable cost per unit	$	800	$	1,200	$	1,000
Upholstery shop time required to produce one unit		8 hours		10 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 should the company be willing to pay 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 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?

	Yes
	No

Answer 1

1)

	Sofa
Sales price per unit	$ 1,800
Less: variable cost per unit	(1,200)
Contribution margin per unit	600
Labor hours per unit	10 hours
Maximum overtime premium per hour (600/10)	$ 60

2)        

	Love seat
Sales price per unit	$ 1,500
Less: variable cost per unit	(1,000)
Contribution margin per unit	500
Labor hours per unit	5 hours
Contribution margin per hour (500/5)	100
Less: purchase price	(45)
Additional contribution margin per hour	$ 55

3)         Yes, management should accept the offer