Volume Trade-Off Decisions (Please show work, thank you!) 6 Portsmouth Company m

Question

Volume Trade-Off Decisions (Please show work, thank you!)

6 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 belovw Recliner S 1,122 750 6 hours Sofa Selling price per unit Variable cost per unit Upholstery shop time required to produce one unit Love Seat 2,065 1,440 1,350 1,100 4 hours 13 hours Requirecd 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 of a premium should the company be willing to pay in terms of an overtime premium 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 $51 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? 3. Should Portsmouth hire the nearby upholstering company? Complete this question by entering your answers in the tabs below Required 1 Required 2Required 3 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 of a premium should the company be willing to pay in terms of an overtime premium per hour to keep the upholstery shop open after normal working hours? Maximum overtime premium per hour

Explanation / Answer

Solution:

1) Calculation of the Maximum Overtime Permium Per Hour:

Therefore, the Maximum Overtime Permium Per Hour is $55.00.

2) Calculation of the Additional Contribution Margin Per Hour:

3) Yes, the Offer to upholster chairs for $55 per hour should be accepted. All the Units of the Company that Produces Recliner, Sofa and Love seat are Worth more than the $51 Per Hour of Cost, So, the Firm should accept the offer.

Sofas Selling price $2,065 Less: Variable cost per unit $1,350 Contribution margin per unit (a) $715 Upholstery shop time required to produce one unit (b) 13 Hrs Contribution margin per unit of the constrained resource (a)/(b) $55.00 Per Hour

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