Question

Harold Manufacturing produces denim clothing. This year, it produced 5,220 denim jackets at a manufacturing cost of $42.00 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 secondhand clothing shop for $7.00 each.
2) Jackets can be disassembled at a cost of $32,700 and sold to a recycler for $12.00 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 5,220 jackets into only 2,970 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $101,900, but the jackets can then be sold for their regular price of $44.00 each.
Required:
Calculate the incremental income.

Answer 1

First option has incremental income of $36,540

The second option has incremental income of $29,940

The third option has incremental income of $28,780

Step-by-step explanation:

Incremental income=incremental revenue-incremental cost

Option 1

Incremental revenue=5,220*$7=$36,540

incremental cost is $0

incremental income=$36,540 -$0=$36,540

Option 2:

Incremental revenue=$12*5,220=$62,640

Incremental cost =$32,700

incremental income=$62,640-$32,700=$ 29,940

Option 3:

Incremental revenue=$44*2970 =$ 130,680.00

Incremental cost=$101,900

incremental income= 130,680-$101,900=$28,780

Judging from the incremental income perspective,the first option seems to the best of all three options because it has the highest incremental income od $36,450