Question

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 secondhand 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

Short answer

The company should select the third alternative because the net loss of the third alternative is less than all alternatives.

Step-by-step solution

Definition of net loss

The net loss is the amount when the cost and expenses of the product is greater than sales revenue.

Amount of net loss in first alternative

$\begin{array}{rcl}\mathbf{Loss} \mathbf{to} \mathbf{Company}& \mathbf{=}& \mathbf{Quantity} \mathbf{Produced}\mathbf{\times }\mathbf{Manufacturing} \mathbf{Cost}\\ & \mathbf{=}& \mathbf{5}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{45}\\ & \mathbf{=}& \mathbf{\$}\mathbf{225}\mathbf{,}\mathbf{000}\\ & & \end{array}$

$\begin{array}{rcl}\mathbf{Net} \mathbf{Loss} & \mathbf{=}& \mathbf{Total} \mathbf{Loss}\mathbf{-} \mathbf{Amount} \mathbf{Received} \mathbf{from} \mathbf{Sale}\\ & \mathbf{=}& \mathbf{\$}\mathbf{225}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{30}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{195}\mathbf{,}\mathbf{000}\\ & & \end{array}$

Amount of net loss of second alternative

$\begin{array}{rcl}\mathbf{Amount} \mathbf{Recovered}& \mathbf{=}& \mathbf{Amount} \mathbf{Received}\mathbf{-} \mathbf{Cost} \mathbf{of} \mathbf{diassembled}\\ & \mathbf{=}& \mathbf{\$}\mathbf{60}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{32}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{28}\mathbf{,}\mathbf{000}\\ & & \end{array}$

$\begin{array}{rcl}\mathbf{Net} \mathbf{Loss}& \mathbf{=}& \mathbf{Cost} \mathbf{of} \mathbf{Manufacturing}\mathbf{-} \mathbf{Amount} \mathbf{Recovered}\\ & \mathbf{=}& \mathbf{\$}\mathbf{225}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{28}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{197}\mathbf{,}\mathbf{000}\\ & & \end{array}$

Amount of net loss of third alternative

$\begin{array}{rcl}\mathbf{Amount} \mathbf{Recovered}& \mathbf{=}& \mathbf{Amount} \mathbf{Received} \mathbf{from} \mathbf{Sale}\mathbf{-} \mathbf{Cost} \mathbf{of} \mathbf{rework}\\ & \mathbf{=}& \mathbf{\$}\mathbf{135}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{102}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{33}\mathbf{,}\mathbf{000}\\ & & \end{array}$

$\begin{array}{rcl}\mathbf{Net} \mathbf{Loss}& \mathbf{=}& \mathbf{Cost} \mathbf{of} \mathbf{Manufacturing}\mathbf{-} \mathbf{Amount} \mathbf{Receoverd}\\ & \mathbf{=}& \mathbf{\$}\mathbf{225}\mathbf{,}\mathbf{000}\mathbf{-} \mathbf{\$}\mathbf{33}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{192}\mathbf{,}\mathbf{000}\\ & & \end{array}$