Question

Problem Harold Manufacturing produces denim clothing. This year, it produced 5,000 denim jackets at a manufacturing cost of $45 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 $6 each. 2. Jackets can be disassembled at a cost of $32,000 and sold to a recycler for $12 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 5,000 jackets into only 3,000 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $102,000, but the jackets can then be sold for their regular price of $45 each. Required Which alternative should Harold choose? Show analysis for each alternative.

Answer 1

Ans. : Analysis of first statement :

Amount received from sale = 5,000*6= 30,000 dollar

Total loss to company= quantity produed * manufacturing cost

= 5,000*45= 2,25,000 dollar

Net loss to company = 2,25,000-30,000= 1,95,000 dollar

Analysis of second statement:

Amount recovered = 5,000*12 - 32,000= 28,000 dollar

Net loss to company = 2,25,000-28000= 1,97,000 dollar

Analysis of third statement:

Amount recovered = 3,000*45 - 1,02,000= 33,000 dollar

Net loss to company = 2,25,000- 33,000= 1,92,000 dollar

Alternative 3 Harold should choose because in this alternative loss in minimum of 1, 92, 000 dollar in comparison to other alternatives in which net loss is 1,97,000 and 1,95,000 dollar.