Exercise 10-6 Managing a Constrained Resource [LO10-6] Portsmouth Company makes

Question

Exercise 10-6 Managing a Constrained Resource [LO10-6] 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: Sofa $1,790 $1,250 Love Seat $1,470 $1,150 4 hours Recliner Selling price per unit Variable cost per unit Upholstery labor-hours per unit $1,196 $700 8 hours 12 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? Maximum amount payable per hour

Explanation / Answer

1.

The company should be willing to pay up to $45 per hour to keep the upholstery shop open after normal working hours.

Particulars Sofa ($) Selling price per unit $1,790 Variable cost per unit $1,250 Contribution margin per unit (a) $540 Upholstery shop time required to produce one unit (b) 12 hours Contribution margin per unit of the constrained resource (a) / (b) $45

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