Sell or Process Further Jackson Lumber Company incurs a cost of $392 per hundred

Question

Sell or Process Further Jackson Lumber Company incurs a cost of $392 per hundred board feet in processing certain "rough-cut" lumber, which it sells for $542 per hundred board feet. An alternative is to produce a "finished cut" at a total processing cost of $521 per hundred board feet, which can be sold for $780 per hundred board feet. a. Prepare a differential analysis dated March 4, 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 4 Sell Rough Cut (Alternative 1) Process Further into Finished Cut (Alternative 2) Differential Effect on Income (Alternative 2) Costs, per 100 board ft. Income (Loss), per 100 board ft.

Explanation / Answer

Jackson Lumber Company

Differential Analysis

Alternative 1

Alternative 2

Sell Rough-Cut

Process Further into Finished-Cut

Differential effect on income

Revenue per 100 board feet

$542

$780

$238

Costs per 100 board ft.

$129

$129

Income (Loss) per 100 board ft.

$542

$651

$109

The decision is to process further into Finished-cut lumber.

Explanation: The net income of the company increases by $109 per 100 board ft. of lumber when the company decides to process further into finished-cut lumber.

Note: The analysis ignores the processing cost of $392, as the same is common cost to both the alternatives.

The analysis considers only incremental revenue and costs.

Differential Analysis

Alternative 1

Alternative 2

Sell Rough-Cut

Process Further into Finished-Cut

Differential effect on income

Revenue per 100 board feet

$542

$780

$238

Costs per 100 board ft.

$129

$129

Income (Loss) per 100 board ft.

$542

$651

$109

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