|
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 |
$ 1,308
|
$ 1,900
|
$ 1,170
|
| Variable cost per
unit |
$ 900
|
$ 1,300
|
$ 850
|
| Upholstery
labor-hours per unit |
6 hours
|
12 hours
|
4 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?
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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. 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?
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