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. The company's only variable cost is direct materials. Information concerning three of the company’s upholstered chairs appears below:
| Recliner | Sofa | Love Seat | ||||||||||
| Selling price per unit | $ | 1,262 | $ | 1,700 | $ | 1,200 | ||||||
| Variable cost per unit | $ | 800 | $ | 1,100 | $ | 850 | ||||||
| Upholstery shop time required to produce one unit | 7 hours | 10 hours | 5 hours | |||||||||
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2. A small nearby upholstering company has offered to upholster furniture for Portsmouth at a fixed charge of $58 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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Recliner |
Sofa |
Love Seat |
|
|
Selling price per unit |
$1,262.00 |
$1,700.00 |
$1,200.00 |
|
Variable cost per unit |
$800.00 |
$1,100.00 |
$850.00 |
|
Contribution per unit |
$462.00 |
$600.00 |
$350.00 |
|
Upholstery shop time required to produce one unit |
7 Hours |
10 Hours |
5 Hours |
|
Contribution per hour |
$66.00 |
$60.00 |
$70.00 |
|
Less : Fixed Charge |
$58.00 |
$58.00 |
$58.00 |
|
Additional contribution margin per hour |
$8.00 |
$2.00 |
$12.00 |
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