Question

Harold Manufacturing produces denim clothing. This year, it produced 5,260 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 $31,400 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 5,260 jackets into only 3,040 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 $45.00 each.

Required:
1. Calculate the incremental income.

Answer 1

	Alternative 1 Sell to second- hand shop	Alternative 2 Disassemble and sell to recycler	Alternative 3 Rework and sell at regular price
Incremental revenue	$36,820	$57,860	$136,800
incremental cost	$0	$31,400	$101,300
Incremental income	$36,820	$26,460	$35,500

Decision - Sell to second-hand cloth shop