APPLY THE CONCEPTS: Calculate differential cost in a sell-or-process-further dec

Question

APPLY THE CONCEPTS: Calculate differential cost in a sell-or-process-further decision

Galaxy Corporation buys cedar logs. It removes the bark and cuts each log into cedar planks. It can sell each plank for $40. The cost to produce each plank is $12. GalaxyCorporation has the opportunity to use these planks to make cedar canoes. It takes 10 cedar planks to make one cedar canoe and requires an additional $1,200 in production costs. A cedar canoe can be sold for $1,400. The differential cost of making one cedar canoe is $ _________________ .

APPLY THE CONCEPTS: Calculate differential income in a sell-or-process-further decision

Complete the table to compare the effects of selling at the split-off point or processing further. In the Differential Effect on Income (Canoe) column. Enter all amounts as positive numbers except for a net loss.

Based on the analysis, Galaxy Corporation should _________________ . If Galaxy processes the planks into canoes, its overall income will _________________ by $ _________________ per canoe.

Alternatives Differential Effect
Increase/Decease (Canoe) Ten Planks One Canoe Sales $ _________________ $ _________________ $ _________________ Costs _________________ _________________ _________________ Net income (loss) $ _________________ $ _________________ $ _________________

Explanation / Answer

Should not further process the canoes

Income will decrease by $ 200 per canoe.

Alternatives Differential effect (Increase or decrease) Ten planks one canoe sales 40*10 =400 1400 1000 cost 12*10 = (120) 120+1200 = (1320) (1200) net income /(loss) 280 80 (200)

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