Question

10-4A

Harold Manufacturing produces denim clothing. This year, it produced 5,280 denim jackets at a manufacturing cost of $41.00 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 $700 each 2. Jackets can be disassembled at a cost of $31,100 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 5,280 jackets into only 2,980 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $101,200, but the jackets can then be sold for their regular price of $44.00 each.

Answer 1

	Alternative 1 Sell to a second hand shop	Alternative 2 Dissamble and sell to a recyler	Alternative 3 rework and sell at regular price
Incremental revenue	5,280*$7 = $36,960	5,280*$12 = $63,360	2,980*$44 = $131,120
Less: Incremental cost	$                                    -	$                           31,100	$                           101,200
Incremental income	$                        36,960	$                           32,260	$                             33,800

Company should sell to second hand shop.

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