Question

Hip Manufacturing produces denim clothing. This year it produced 3,040 denim jackets at a cost of $91,200. These jackets were
damaged in the warehouse during storage. Management identified three alternatives for these jackets.
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1. Jackets can be sold as scrap to a secondhand clothing shop for $18,240.
2. Jackets can be disassembled at a cost of $6,080 and sold to a recycler for $36,480.
3. Jackets can be reworked and turned into good jackets. The cost of reworking the jackets will be $103,360, and the jackets can ther
be sold for $136,800.
Required:
(1) Compute the income for each alternative.
(2) Which alternative should be chosen?
Scrap, Recycle or Rework Analysis
Revenue from scrap/recycle/rework
Cost of recycled/reworked units
Income
S
Scrap
0 $
Recycle
0 $
Rework
0

Answer 1

1. The income for each alternative for the damaged jackets of Hip Manufacturing is as follows:

                                      Scrap            Recycle           Rework

Sales Revenue           $18,240          $36,480         $136,800

Additional cost                      0              6,080            103,360

Income                      $18,240         $30,400           $33,440

2. The chosen alternative is C. reworking.

Data and Calculations:

Production units = 3,040

Production costs = $91,200

                                      Scrap            Recycle           Rework

Sales Revenue           $18,240          $36,480         $136,800

Additional cost                      0              6,080            103,360

Income                       $18,240          $30,400           $33,440

Thus, reworking yields the highest income and should be chosen as it reduces the loss from the damage more than scrapping or recycling.

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