Harold Manufacturing produces denim clothing. This year, it produced 5,120 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. Jackets can be sold as is to a secondhand clothing shop for $8.00 each. Jackets can be disassembled at a cost of $32,200 and sold to a recycler for $12.00 each. 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 5,120 jackets into only 2,900 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $101,700, but the jackets can then be sold for their regular price of $45.00 each.

Question

Keyla Schmitt

Business

22 August, 03:26

Harold Manufacturing produces denim clothing. This year, it produced 5,120 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. Jackets can be sold as is to a secondhand clothing shop for $8.00 each. Jackets can be disassembled at a cost of $32,200 and sold to a recycler for $12.00 each. 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 5,120 jackets into only 2,900 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $101,700, but the jackets can then be sold for their regular price of $45.00 each.

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Answers (1)

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Alfred Barrera · Answer 1

the best option is number 1, sell the jackets to a secondhand store at $8 will yield $40,960 in profits

Explanation:

the previous manufacturing costs can be considered sunk costs because they cannot be recovered, so we must analyze the options to determine which one yields the highest profit.

option 1

sell 5,120 jackets to secondhand stores at $8 each, profit = $40,960

option 2

disassemble the jackets and sell them at $12 each, profit = $61,440 - $32,200 (disassembling costs) = $29,240

option 3

rework the jackets, profit = ($45 x 2,900) - $101,700 = $28,800

the best option is number 1, sell the jackets to a secondhand store at $8 will yield $40,960 in profits