Exercise 11-6 Managing a Constrained Resource [LO11-6]
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 | $ | 1,298 | $ | 1,770 | $ | 1,200 | ||||||
| Variable cost per unit | $ | 850 | $ | 1,250 | $ | 850 | ||||||
| Upholstery labor-hours per unit | 7 hours | 13 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 $34 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 hires the nearby upholstering company to make Love Seats?
3. Should Portsmouth hire the nearby upholstering company?
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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A small nearby upholstering company has offered to upholster furniture for Portsmouth at a fixed charge of $34 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 hires the nearby upholstering company to make Love Seats?
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Should Portsmouth hire the nearby upholstering company?
| 1 | |
| Sofa | |
| Selling price per unit | 1770 |
| Less: Variable cost per unit | 1250 |
| Contribution margin per unit | 520 |
| Upholstery shop time required to produce one unit | 13 |
| Maximum overtime premium per hour | 40 |
| 2 | |
| Love seats | |
| Selling price per unit | 1200 |
| Less: Variable cost per unit | 850 |
| Contribution margin per unit | 350 |
| Upholstery shop time required to produce one unit | 5 |
| Contribution margin per hour | 70 |
| Less: Additional Upholstery labor cost per hour | 34 |
| Additional contribution margin per hour | 36 |
| 3 | |
| Yes, Portsmouth should hire the nearby upholstering company | |
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