Question

Harold Manufacturing produces denim clothing. This year, it produced 5,230 denim jackets at a manufacturing cost of $41.00 each. These jackets were damaged in the warehouse during storage. Management investigated the matter and identified three alternatives for these jackets.

1. Jackets can be sold to a second-hand clothing shop for $7.00 each.
2. Jackets can be disassembled at a cost of $32,000 and sold to a recycler for $13.00 each.
3.
Jackets can be reworked and turned into good jackets. However, with the damage, management estimates it will be able to assemble the good parts of the 5,230 jackets into only 3,100 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $103,000, but the jackets can then be sold for their regular price of $45.00 each.



Required:
1.
Calculate the incremental income.

Alternative 1 Sell to a second-hand shop Alternative 2 Disassemble and sell to a recycler Alternative 3 Rework and sell at regular prices
Incremental revenue
Incremental costs
Incremental income

Answer 1

the best option is number 1, sell the jackets to a secondhand store at $7 will yield $36,610 in profits

Step-by-step explanation:

the previous manufacturing costs can be considered sunk costs because they cannot be recovered, so we must analyze the options to determine which one yields the highest profit.

option 1

sell 5,230 jackets to secondhand stores at $7 each, profit = $36,610

option 2

disassemble the jackets and sell them at $12 each, profit = $67,990 - $32,000 (disassembling costs) = $35,990

option 3

rework the jackets, profit = ($45 x 3,100) - $103,000 = $36,500

the best option is number 1, sell the jackets to a secondhand store at $7 will yield $36,610 in profits