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:

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?

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?

Should Portsmouth hire the nearby upholstering company?

Explanation:

                                               Recliner         Sofa             Love Seat

Sales price                                 1,400         1,800                  1,500

variable costs                              800         1,200                  1,000

contribution per unit                   600           600                    500

labor hours per unit                       8               10                        8

contribution per labor hour          75              60                  62.5

Since the contribution per labor hour for a sofa is $60, so the company should be willing to pay up to $60 for the overtime hours.

Since the upholstery company charges less, $45 per hour, then Portsmouth should hire them. They will safe up to $62.50 - $45 = $17.50 per hour and $140 per love seat.

Yes the upholstery company should be hired to increase profit.

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