Question

Calgary Lumber Company incurs a cost of $378 per hundred board feet (hbf) in processing certain “rough-cut” lumber, which it sells for $552 per hbf. An alternative is to produce a “finished cut” at a total processing cost of $523 per hbf, which can be sold for $750 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	$	$	$

Answer 1

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	$552	$750	$198
Costs, per unit	$378	$523	$145
Income (Loss), per unit	$174	$227	$53

It is better to process further into finished cut so as to earn incremental income of $53.