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 constriant) 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	$ 1,800	$ 1,310
Variable cost per unit	$ 750	$ 1,300	$ 800
Upholstery labor-hours per unit	10 hours	10 hours	6 hours

Required:
1.	Portsmouth is considering paying its upholstery laborers additional compensation 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?

Maximum amount payable per hour=

      

2.

A small nearby upholstering company has offered to upholster furniture for Portsmouth at a price 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. Should management accept this offer?

	Yes
	No

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $96,000 per quarter. The company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product	Selling Price			Quarterly Output
A	$	4	per pound		12,000	pounds
B	$	5	per pound		17,000	pounds
C	$	15	per gallon		4,000	gallons

     Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product	Additional Processing Costs			Selling Price
A	$	45,000		$	6	per pound
B	$	40,000		$	9	per pound
C	$	12,250		$	19	per gallon

Required:

a.

Compute the incremental profit (loss) for each product.

	Product A	Product B	Product C
Selling price after further processing
Selling price at the split-off point
Incremental revenue per pound or gallon	0	0	0
Total quarterly output in pounds or gallons
Total incremental revenue	0	0	0
Total incremental processing costs
Total incremental profit or loss	$0	$0	$0

      

b.

Which product or products should be sold at the split-off point? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)

	Product A
	Product B
	Product C

c.

Which product or products should be processed further? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)

	Product A
	Product B
	Product C

Answer 1

.

3. The offer to upholster chairs for $45 per hour should be accepted. The time would be used to upholster Loveseats. If this increases the total production and sales of those chairs, the time would be worth $85 per hour—a net gain of $40 per hour. If Loveseats are already being produced up to demand, then having these chairs upholstered in the other company would free up capacity to produce more of the other two chairs. In both cases, the additional time is worth more than $45 per hour.