Harold Manufacturing produces denim clothing. This year, it produced 5,160 denim

Question

Harold Manufacturing produces denim clothing. This year, it produced 5,160 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 reworked and turned into good jackets. However, with the damage, management estimates it will be able to assemble the good parts of the 5,160 jackets into only 3,000 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $101,700, but the jackets can then be sold for their regular price of $44.00 each.

Harold Manufacturing produces denim clothing. This year, it produced 5,160 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.

Explanation / Answer

NOTE: incremental calculations are done per unit basis

Alternative 1

Revenue: $ 8 Cost: $ 42 => Net Income = 8 - 42 = - 34

Alternative 2

Revenue: $ 12 Cost: $ 42 + (31800/5160) = 42 + 6.16 = 48.16 => Net Income = 12 - 48.16 = - 36.16

Alternative 3

Revenue: $ 44 Cost: $ {(42 x 5160) + (101700)}/3000 = (216720 + 101700)/3000 = 318420/3000 = 106.14 => Net Income = 44 - 106.14 = - 62.14

Explanations

In all three cases, the original manufacturing cost of $42 per unit must be factored in.

In case 2, the total cost = the original cost + additional cost of $ 31800

In case 3, the total cost = the original cost + additional cost of $ 101700. In addition, since reworking gives only 3000 units worth selling, this total cost must pertain to 3000 units.

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