Question

Sell or Process Further

Calgary Lumber Company incurs a cost of $376 per hundred board feet (hbf) in processing certain “rough-cut” lumber, which it sells for $564 per hbf. An alternative is to produce a “finished cut” at a total processing cost of $529 per hbf, which can be sold for $778 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 Effect on Income (Alternative 2)
Revenues, per unit	$	$	$
Costs, per unit
Income (Loss), per unit	$	$	$

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

Answer 1

a. Differential analysis dated March 15, on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2) is as prepared below:

Differential Analysis
Sell Rough-Cut (Alt. 1) or Process Further into Finished-Cut (Alt. 2)
Mar-15
	Sell Rough-Cut	Process Further	Differential
	(Alternative 1)	into Finished-Cut	Effect on Income
		(Alternative 2)	(Alternative 2)
Revenues, per unit	564	778	214
Costs, per unit	376	529	153
Income (Loss), per unit	188	249	61

b. Lumber should be further processed into finished-cut as we have more profit in further processing and selling later.