Question

Harold Manufacturing produces denim clothing. This year, it produced 5,160 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 as is to a secondhand clothing shop for $8.00 each.
2. Jackets can be disassembled at a cost of $32,200 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 5,160 jackets into only 3,000 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $101,400, but the jackets can then be sold for their regular price of $45.00 each.

Required:
1. Calculate the incremental income.

Answer 1

Answer:

Incremental income

	Alternative 1 - Sell to a second clothing shop	Alternative 2 - Disassemble and sell to a recycler	Alternative 3 - Rework and sell at regular price
Incremental revenue	( 5,160 * $8) = $41,280	( 5,160 * $12) = $61,920	( 3,000 * $45) = $135,000
Incremental cost	$0	$32,200	$101,400
Incremental income	$41,280	$29,720	$33,600

Conclusion: The company must choose Alternative 1 ie, Sell to a second clothing shop, as it has the highest  incremental income.