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	$	1,444		$	2,070		$	1,500
Variable cost per unit	$	850		$	1,300		$	1,150
Upholstery labor-hours per unit	9 hours			14 hours			5 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?

2. A small nearby upholstering company has offered to upholster furniture for Portsmouth at a price of $53 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?

Answer 1

			Recliner	Sofa	Love seat
Selling price			1444	2070	1500
Less: Variable cost			850	1300	1150
CM per unit			594	770	350
Divide: DLH per unit			9	14	5
CM per DLH			66	55	70
Ranking			II	III	I
The Overime premium of $ 55 per hour can be paid to the maximum
Req 2.
CM per unit received from Love seat					350
Less: Upholster wages per unit ($ 53 per hour for 5 hours					265
Additional contribution per unit of Love seat made by upholster					85
Divide: Hours per unit					5
Additional CM per hour					17
Req 3.
Yes, Portsmouth shall hire upholster.