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 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…………………………….. $1,400 $1,800 $1,500
Variable cost per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800 $1,200 $1,000
Upholstery shop time required to produce one unit…….. 8 hours 10 hours 5 hours
EXERCISE 12–4 Special Order Decision LO12–4
Imperial Jewelers manufactures and sells a gold bracelet for $189.95. The company’s accounting
system says that the unit product cost for this bracelet is $149.00 as shown below:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . $ 84.00
Direct labor……………………… 45.00
Manufacturing overhead . . . . . . . . . . . . . . . 20.00
Unit product cost…………………. $149.00
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Differential Analysis: The Key to Decision Making 593
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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 $45 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?
3. Should Portsmouth hire the nearby upholstering company? Explain.