Question

Problem 10-4A Sell or process LO A1

Harold Manufacturing produces denim clothing. This year, it produced 5,120 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 $8.00 each.
2. Jackets can be disassembled at a cost of $31,300 and sold to a recycler for $11.00 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 5,120 jackets into only 2,980 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $101,800, but the jackets can then be sold for their regular price of $45.00 each.

Required:
1. Calculate the incremental income.

Answer 1

Answer

Alternative -1

Jackets can be sold to a second hand clothing shop at the price of $ 8 each

Number of jackets = 5,120

Income from the alternative 1 = price per jackets * Number of jackets

= $ 8 * 5120

= $ 40,960

Alternative - 2

Jackets can be disassembled at a cost of $31,300 and sold to a recycler for $11.00 each.

Number of jackets = 5,120

Income from the Alternative 2 =(Price per jackets * Number of jackets) - Disassembled cost

= ( $ 11 * 5,120 ) - $31,300

= $ 56,320 - $ 31,300

= $ 25,020

Alternative -3

Jackets can be reworked

Cost of reworking of jackets = $ 101,800

Number of jackets can be made good jackets as per management estimate = 2,980

And price of good jackets = $ 45 each

Income from the alternative - 3 = (Price per jackets * Number of good jackets) - cost of rework

= ( $ 45 * 2,980) - $ 101,800

= $ 134,100 -$ 101,800

= $ 32,300

Since the income from the alternative 1 is more than other alternatives .So the incremental income is $ 40,960

It is better for the management to go with the alternative 1