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Portsmouth Company makes upholstered furniture

Accounting Mar 19, 2021

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 constraint) in the production process is upholstery labor-hours. Information concerning three of Portsmouth's products appears below: 
Sofa Love Seat Recliner Selling price per unit $ 1,358 $ 1,850 $ 1,580 Variable cost per unit $ 800 S 1,200 $ 1,100 Upholstery labor-hours per unit 9 hours 13 hours 6 hours 
Required: 1. Portsmouth is considering paying its upholstery laborers hourly compensation, in addition to their usual salaries, to work overtime. Assuming that this extra time would be used to produce sofas, up to how much of an overtime rate per hour should the company be willing to pay 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 price of $45 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 hires the nearby upholstering company to make Love Seats? 3. Should Portsmouth hire the nearby upholstering company?

Expert Solution

1  
  Sofas
Selling price per unit 1850
Less: Variable cost per unit 1200
Contribution margin per unit 650
Upholstery shop time required to produce one unit 13
Contribution margin per unit of the constrained resource 50
   
Maximum overtime premium per hour = $50  
   
2  
  Love seat
Selling price per unit 1580
Less: Variable cost per unit 1100
Contribution margin per unit 480
Upholstery shop time required to produce one unit 6
Contribution margin per unit of the constrained resource 80
Less: Additional cost per hour 45
Additional Contribution margin per hour 35
   
3  
Yes, hire the nearby upholstering company.  
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