4 Portsmouth Company makes fine colonial reproduction furniture. Upholstered fur

Question

4 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 chalrs appears below: points Recliner Sofa Selling price per unit Variable cost per unit Upholstery shop time required to produce one unit Love Seat 1,6ee 1,150 6 hours 1,422 $ 900 $ 2,240 $ 1,400 $ 9 hours 14 hours eBook Required .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 premlum should the company be willing to pay In terms of an overtime premlum 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 $54 per hour. The management of Portsmouth is confident that this upholstering company's work is high quality and thelr 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? Hint Print Complete this question by entering your answers in the tabs below RequiredRequired 2 Required 3 More time could be made available in the upholstery shp by asking the employees who work in this shP 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? aximum overtime premium per hour

Explanation / Answer

4. 1. For this we will have to compute the contribution margin per unit in case of "Sofa":

2: For this use the contribution schedule and divide the contribution margin per unit by the constrained resource required per unit to determine the contribution margin per unit of the constrained resource:

Thus additional contribution margin per hour = $75 - $54 = $21

3. Yes as the additional time is worth $75 per hour and this is more than $54 per hour Portsmouth should hire the nearby upholstering company.

Sofa Selling price $                2,240.00 Less Variable cost per unit                    1,400.00 Contribution margin per unit (a)                       840.00 Upholstery shop time required to produce one unit (b) 14 hours Contribution margin per unit of the constrained resource (a)/(b) $                     60.00 per hour The Company should be willing to pay at least $60 per hour

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