Question

Sell or Process Further

Calgary Lumber Company incurs a cost of $382 per hundred board feet (hbf) in processing certain “rough-cut” lumber, which it sells for $566 per hbf. An alternative is to produce a “finished cut” at a total processing cost of $528 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 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
Sell Rough-Cut (Alt. 1) or Process Further into Finished-Cut (Alt. 2)
March 15
	Sell Rough-Cut	Process Further	Differential
	(Alternative 1)	into Finished-Cut	Effect on Income
		(Alternative 2)	(Alternative 2)
Revenues, per unit	566	748	182
Costs, per unit	-382	-528	-146
Income (Loss), per unit	184	220	36
b
Process further into finished-cut lumber (Alternative 2).