Portsmouth Company makes upholstered furniture. Its onlyvariable cost is direct materials. The demand for the company'sproducts far exceeds its manufacturing capacity. The bottleneck (orconstriant) in the production process is upholstery labor-hours.Information concerning three of Portsmouth's upholstered chairsappears below:
| Recliner | Sofa | Love Seat |
| Selling price per unit | $ | 1,064 | | $ | 1,910 | | $ | 1,630 | |
| Variable cost per unit | $ | 700 | | $ | 1,250 | | $ | 1,150 | |
| Upholstery labor-hours per unit | 7 hours | | 12 hours | | 6 hours | |
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Required:
1. Portsmouth is considering paying its upholstery laborersadditional compensation to work overtime. Assuming that this extratime would be used to produce sofas, up to how much of an overtimepremium per hour should the company be willing to pay to keep theupholstery shop open after normal working hours?
2. A small nearby upholstering company has offered to upholsterfurniture for Portsmouth at a price of $50 per hour. The managementof Portsmouth is confident that this upholstering company’s work ishigh quality and their craftsmen can work as quickly asPortsmouth’s own craftsmen on the simpler upholstering jobs such asthe Love Seat. How much additional contribution margin per hour canPortsmouth earn if if it hires the nearby upholstering company tomake Love Seats?
3. Should Portsmouth hire the nearby upholstering company?
A small nearby upholstering company has offered to upholsterfurniture for Portsmouth at a price of $50 per hour. The managementof Portsmouth is confident that this upholstering company’s work ishigh quality and their craftsmen can work as quickly asPortsmouth’s own craftsmen on the simpler upholstering jobs such asthe Love Seat. How much additional contribution margin per hour canPortsmouth earn if if it hires the nearby upholstering company tomake Love Seats?
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| | Additional contribution margin per hour | |
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