Harold Manufacturing produces denim clothing. This year, it produced 5,290 denim

Question

Harold Manufacturing produces denim clothing. This year, it produced 5,290 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. Jackets can be sold to a second-hand clothing shop for $8.00 each. Jackets can be disassembled at a cost of $32,200 and sold to a recycler for $11.00 each. 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 5,290 jackets into only 2,950 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $102,500, but the jackets can then be sold for their regular price of $45.00 each. Calculate the incremental income.

Explanation / Answer

Answer:

Calculation of Incremental Revenue

Incremental Income under ALternative 1 is higher than other alternatives. Hence Management is suggested to go for Alternative 1.

Working Note & Explanation

Note 1: The Manufacturing cost $42 each for fabrication of denim jackets is a SUNK Cost that have already been incurred in past and never changed & & it is same under each alternative course of action. Hence it is IRRELEVANT in the decision.

Alternative 1: Sell to a second-hand shop ----- When Denim Jackets will be sold to Second Hand Shop @ $8 each. this all amount will become the revenue for company. No cost involved here.

Altenative 2: Disassemble and sell to a recycler -- Disassembled Cost $32,200 is future cost and it is relevant in decision making because it has influence over the decision of management. So it is considered while evaluating the alternatives.

Alternative 3: Rework and Sell at regular prices -- Rework cost is relevant & hence cosidered while decision making. Since by reworking only 2950 jacket can be converted into good jackets. Revenue of only 2950 jacket are considered.

Particulars Alernative 1 Alternative 2 Alternative 3 Sell to a second-hand shop Disassemble and sell to a recycler Rework and Sell at regular prices Incremental Revenue $42,320 $58,190 $132,750 Incremental Costs $0 $32,200 $102,500 Incremental Income $42,320 $25,990 $30,250

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