EXERCISE 12-6 Managing a Constrained Resource [L012-6] 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 fur- niture far exceeds the company's capacity in the upholstering shop. Information concerning three of the company's upholstered chairs appears below: Recliner Sofa Love Seat Selling price per unit ....... Variable cost per unit... Upholstery shop time required to produce one unit ..... $1,400 $800 8 hours $1,800 $1,200 10 hours $1,500 $1,000 5 hours Required: 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 should the company be willing to pay 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 $45 per hour. The management of Portsmouth is confident that this uphol- stering company's work is high quality and their craftsmen should be able to work about as quickly as Portsmouth's own craftsmen on the simpler upholstering jobs such as the love seat. Should management accept this offer? Explain.
Related questions
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 companyâs capacity in the upholstering shop. The company's only variable cost is direct materials. Information concerning three of the companyâs upholstered chairs appears below:
| Recliner | Sofa | Love Seat | ||||||||||
| Selling price per unit | $ | 1,120 | $ | 1,645 | $ | 1,460 | ||||||
| Variable cost per unit | $ | 700 | $ | 1,150 | $ | 950 | ||||||
| Upholstery shop time required to produce one unit | 7 hours | 11 hours | 6 hours | |||||||||
Required:
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 $40 per hour. The management of Portsmouth is confident that this upholstering companyâs work is high quality and their craftsmen can work as quickly as Portsmouthâs 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?
Portsmouth Company makes fine colonial reproduction furniture.Upholstered furniture is one of its major product lines and thebottleneck on this production line is time in the upholstery shop.Upholstering is a craft that takes years of experience to masterand the demand for upholstered furniture far exceeds the companyâscapacity in the upholstering shop. Information concerning three ofthe companyâs upholstered chairs appears below:
| Recliner | Sofa | Love Seat | ||||
| Selling price perunit | $1,314 | $1,650 | $1,290 | |||
| Variable cost per unit | $850 | $1,100 | $950 | |||
| Upholstery shop time required toproduce one unit | 8 hours | 10 hours | 4 hours | |||
Required:
1. More time could be made available in the upholstery shop byasking the employees who work in this shop to work overtime.Assuming that this extra time would be used to produce sofas, up tohow much should the company be willing to pay per hour to keep theupholstery shop open after normal working hours?
2. A small nearby upholstering company has offered to upholsterfurniture for Portsmouth at a fixed charge of $50 per hour. Themanagement of Portsmouth is confident that this upholsteringcompanyâs work is high quality and their craftsmen should be ableto work about as quickly as Portsmouth's own craftsmen on thesimpler upholstering jobs such as the love seat. Should managementaccept this offer?
| Yes | |
| No |
