Question

Sell or Process Further Calgary Lumber Company incurs a cost of $396 per hundred board feet (hbf) in processing certain "rough-cut" lumber, which it sells for $542 per hbf. An alternative is to produce a "finished cut" at a total processing cost of $528 per hbf, which can be sold for $740 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 Process Further Differential Sell-Rough-Out (Alternative 1) into Finished-Out Effect on Income (Alternative 2) (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

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 (if Alternative 2 is chosen)
Revenues, per unit	$542	$740	$198
Costs per unit	$396	$528	($132)
Income (Loss), per unit            [Revenue - Cost]	$146	$212	$66

.

**Additional revenue = $740 - $542 = $198

**Additional cost = $528 - $396 = $135

**Additional income = $212 - $146 = $66

.

.

2. Determine whether the company should sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

Process further.

Reason: As processing further and then selling would result in an additional income of $66.