Georgian Ambience Ltd. Makes find colonial reproduction furniture. Upholstered f

Question

Georgian Ambience Ltd. Makes find 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: 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 Leather Library Chairs, up to how much should the company be willing to pay per hour to keep the upholstery shop open after normal working hours? A small nearby upholstering company has offered to upholster furniture for Georgian Ambience at a fixed charge of $51 per hour. The management of Georgian Ambience is confident that this upholstering company's work is high quality and their craftsmen should be able to work about as quickly as Georgian Ambience's own craftsmen on the simpler upholstering jobs such as the Chippendale Fabric Armchair. Should management accept this offer?

Explanation / Answer

Answer:

I am providing a cumulative solution for both parts:

1. The company should be willing to pay atleast $55 per hour (from 3rd column and last row).

2. Since contribution margin per unit of the constrained resource for all 3 types of armchair is more than fixed charge of $51 per hour, therefore, the management should accept this offer.

Gainsborough Armchair Leather Library armchair Chippendale Fabric armchair Selling price per unit $                               1,212.00 $                                    1,860.00 $                                          1,475.00 Variable cost per unit $                                   900.00 $                                    1,200.00 $                                          1,100.00 Contribution margin per unit (a) $                                   312.00 $                                        660.00 $                                              375.00 Upholstery shop time required to produce one unit (b) $                                        6.00 $                                          12.00 $                                                   5.00 Contribution margin per unit of the constrained resource (a)/ (b) $                                     52.00 $                                          55.00 $                                                75.00

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