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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
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:
Required:
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?
A small nearby upholstering company has offered to upholster furniture for Portsmouth at a price of $ 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?
Should Portsmouth hire the nearby upholstering company?
Answer is complete but not entirely correct.
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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?
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