BUSINESS HIGH SCHOOL

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: Recliner Sofa Love Seat Selling price per unit $ 1,400 $ 1,800 $ 1,500 Variable cost per unit $ 800 $ 1,200 $ 1,000 Upholstery labor-hours per unit 8 hours 10 hours 5 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? 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 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?

Answers

Answer 1
Answer:

1.- For the sofa, it can pay at most 60 dollars per hour.

2.- 17.5 per hour

3.- It should. It will create additional gains.

The contribution margin is defined as the difference between the selling price and the variable cost per unit. The variable cost doesn't include any of the selling and administrative cost.

The computation of contribution margin for each of the cases is given in the image below.

To know more about the contribution margin and its computation, refer to the link below:

brainly.com/question/15731199?referrer=searchResults
Answer 2
Answer:

Final answer:

Portsmouth Company can pay a maximum overtime premium of $60 per hour for sofa production without affecting profitability. Outsourcing Love Seat production at $45 per hour increases the contribution margin by $55 per hour. Considering quality and capacity factors, outsourcing seems beneficial for Portsmouth.

Explanation:

To calculate the maximum overtime premium per hour that Portsmouth Company should be willing to pay, we need to determine the contribution margin per upholstery labor-hour for sofas. The contribution margin for a sofa is its selling price ($1,800) minus the variable cost ($1,200), which equals $600. The sofa requires 10 upholstery labor-hours, so the contribution margin per hour is $600/10 hours = $60 per hour. This is the maximum amount Portsmouth can pay for the overtime premium, as paying more would not be profitable.

Contribution Margin Per Hour for Outsourcing Love Seat Upholstery

For the Love Seat, the selling price is $1,500 and the variable cost is $1,000, giving us a contribution margin of $500. Outsourcing labor at $45 per hour would mean the Love Seat requires only 5 labor-hours, thus the contribution margin per hour would be $500/5 hours = $100 per hour minus the outsourcing cost of $45 per hour, resulting in an additional $55 per hour. It increases Portsmouth's contribution margin per hour, making this option potentially profitable.

Decision on Outsourcing

Whether Portsmouth should hire the nearby upholstering company depends on various factors, such as capacity, quality, delivery times, and potential long-term benefits. Since the management has confidence in the quality and efficiency of the other company, and outsourcing would increase the contribution margin per hour for Love Seats, it appears a good business decision to subcontract this work.

Learn more about Cost Accounting here:

brainly.com/question/24130824

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Answers

Answer:

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Answers

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Answers

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Answers

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Answers

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Answers

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