Exercise 11-6 (Algo) Managing a Constrained Resource [LO11-6]

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:

	Recliner	Sofa	Love Seat
Selling price per unit	$ 1,330		$ 1,950		$ 1,275
Variable cost per unit	$ 750		$ 1,250		$ 850
Upholstery labor-hours per unit	10	hours	14	hours	5	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 $46 per hour. The management of Portsmouth is confident that this upholstering companys work is high quality and their craftsmen can work as quickly as Portsmouths 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?

Exercise 11-13 (Algo) Sell or Process Further Decision [LO11-7]

Wexpro, Incorporated, produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $53,000 per ton, one-fourth of which is allocated to product X15. Eight thousand three hundred units of product X15 are produced from each ton of clypton. The units can either be sold at the split-off point for $10 each, or processed further at a total cost of $7,100 and then sold for $13 each.

Required:

1. What is the financial advantage (disadvantage) of further processing product X15?

2. Should product X15 be processed further or sold at the split-off point