Question

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. Information concerning three of the company’s upholstered chairs appears below: Recliner Sofa Love Seat Selling price per unit $1,358 $1,850 $1,460 Variable cost per unit $800 $1,250 $950 Upholstery shop time required to produce one unit 9 hours 10 hours 6 hours Required:

1. More time could be made available in the upholstery shop by asking the employees who work in this shop to work overtime. Assuming that this extra time would be used to produce sofas, up to how much should the company be willing to pay per hour 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 fixed charge of $58 per hour. The management of Portsmouth is confident that this upholstering company’s work is high quality and their craftsmen should be able to work about as quickly as Portsmouth's own craftsmen on the simpler upholstering jobs such as the love seat. Should management accept this offer? Yes No

Answer 1

working:

first let us known the contribution per upholstery hour:

	recliner	sofa	love seat
sale price	1,358	1,850	1,460
less:variable cost	(800)	(1,250)	(950)
contribution margin	558	600	510
upholstery shop time	9 hrs	10 hrs	6 hrs
contribution per hour of upholstery shop time	$62	$60	$85

1.The company should be willing to pay $60 per hour to keep the upholstery shop open after normal working hours, when such time is being used to produce sofas, since $60 per hour is the contribution per upholstery hour of sofa.

2.Yes.

The management should accept the offer since the charge of $58 per hour is less than the contribution per upholstery hour of all the three products ($62,$60,$85) ,not only of the Love seats.