Question

Sell or Process Further

Calgary Lumber Company incurs a cost of $400 per hundred board feet (hbf) in processing certain “rough-cut” lumber, which it sells for $570 per hbf. An alternative is to produce a “finished-cut” at a total processing cost of $529 per hbf, which can be sold for $748 per hbf.

a. Prepare a differential analysis dated March 15 on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

Differential Analysis
Sell Rough-Cut (Alt. 1) or Process Further into Finished-Cut (Alt. 2)
March 15
	Sell Rough-Cut (Alternative 1)	Process Further into Finished-Cut (Alternative 2)	Differential Effects (Alternative 2)
Revenues, per 100 board ft.	$	$	$
Costs, per 100 board ft.
Profit (Loss), per 100 board ft.	$	$	$

b. Determine whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

Answer 1

a.

Differential Analysis
Sell Rough-Cut (Alt. 1) or Process Further into Finished-Cut (Alt. 2)
Mar-15
	Sell	Process Further	Differential
	Rough-Cut	into Finished-Cut	Effects
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Revenues, per 100 board ft.	570	748	178
Costs, per 100 board ft.	-400	-529	-129
Profit (Loss), per 100 board ft.	$170	$219	$49

b.

It is advantageous to process further.

Net incremental benefit of processing further = $49.

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