Problem
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:
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Recliner
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Sofa
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Love Seat
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Selling price per unit
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$ 1,086
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$ 1,980
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$ 1,220
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Variable cost per unit
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$ 750
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$ 1,200
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$ 900
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Upholstery labor-hours per unit
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6 hours
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13 hours
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4 hours
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Task
A. 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?
B. A small nearby upholstering company has offered to upholster furniture for Portsmouth at a price of $56 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?
C. Should Portsmouth hire the nearby upholstering company?