Question

Big Fork Lumber Company incurs a cost of $402 per hundred board feet (hbf) in processing certain "rough-cut" lumber, which it sells for $540 per hbf. An alternative is to produce a "finished cut" at a total processing cost of $523 per hbf, which can be sold for $668 per hbf. Prepare a differential analysis dated August 9 on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

Answer 1

Answer and Explanation:

The preparation of the differential analysis is presented below:

Particulars Sell Rough cut Process Differential

(Alternative 1) Further into Effect on income

Finished cut (Alternative 2)

(Alternative 2)

Revenues

per 100 board feet $540 $668 $128

Cost per $100

Board ft -$402 -$523 -$121

Income

or loss

per 100 board $138 $145 $7

In the case when the product would get process further so there is an increase in revenue by $7