Question

Harold Manufacturing produces denim clothing. This year, it produced 5,000 denim jackets at a manufac­turing cost of $45 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 $6 each.
2. Jackets can be disassembled at a cost of $32,000 and sold to a recycler for $12 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 5,000 jackets into only 3,000 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $102,000, but the jackets can then be sold for their regular price of $45 each.
Required:
Which alternative should Harold choose? Show analysis for each alternative?

Answer 1

Option 3, although it has more losses and costs, you'll end up with less debt in the end.

Step-by-step explanation:

Here's the total loss. 5,000 jackets x $45 production cost=-225,000

1.(Secondhand) 5,000(6)=30,000 profit, but you still have 195,000 in production losses

2. (Recycler) 5,000(12)=60,000 in saved revenue, but you have 32,000 extra to pay. That brings you to 197,000 in losses for #2, just 2 grand more than the first.

3. 3000(45)=135,000 profit-102,000 restorations cost=33,000 leftover, and then the 90,000 from the 2000 lost, all the profit and losses leave you with 57,000 in losses. It's the best scenario since you lose less compared to the other two options.