Question

Harold Manufacturing produces denim clothing. This year, it produced 5,260 denim jackets at a manufacturing cost of $42 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 second-hand clothing shop for $8.00 each
2. Jackets can be disassembled at a cost of $31,800 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 5,260 jackets into only 3,050 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $102,200, but the ackets can then be sold for their regular price of $45.00 each.
Required:
Calculate the incremental income.

Answer 1

Answer:

Incremental net income = $42,080

Explanation:

Note the the income would be that which result from the alternative action with the highest net income Note that the manufacturing cost of $12 per unit is not relevant for the purpose of this decision and hence would not form part of the analysis

                                                                                         $

Option one: Outright sale

Sales from disposal =   5,260× 8                               42,080

Option 2: disassembling

Revenue                                $12 × 5,260  =                63120

Cost of disassembling                                                 ( 31,800)

Net income                                                                   31,320

Option 3: Reworking

Sales revenue                       ($45.00× 3,050)              137250

Cost of reworking                                                           (102,200)

Net income                                                                      35,050

         

The outright option gives the highest net income hence should be considered.

Incremental net income = $42,080