Question

Problem 23-4A Sell or process LO A1 Harold Manufacturing produces denim clothing. This year, it produced 5,180 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 $7.00 each. 2. Jackets can be disassembled at a cost of $33,000 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 5,180 jackets into only 3,080 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $101,300, but the jackets can then be sold for their regular price of $40.00 each. Required: 1. Calculate the incremental income. Alternative 1 Sell to a second- hand shop Alternative 2 Alternative 3 Disassemble and Rework and sell at sell to a recycler regular prices Incremental revenue Incremental costs Incremental income $ 0 $

Answer 1

	Alternative 1 Sell as is	Alternative 2 Disassemble and sell to a recycler	Alternative 3 Rework and turn into good jackets
Incremental revenue	36260	56980	123200
Incremental costs	0	33000	101300
Incremental income	36260	23980	21900
The company should choose:	Alternative 1
Workings:
	Alternative 1 Sell as is	Alternative 2 Disassemble and sell to a recycler	Alternative 3 Rework and turn into good jackets
Incremental revenue	=5180*7	=5180*11	=3080*40