Highlands, Inc. operates a sawmill facility. The company accounts for the sawdus

Question

Highlands, Inc. operates a sawmill facility. The company accounts for the sawdust that results from the primary sawing operation as a by-product. The sawdust is sold to another company at a price of $1.00 per hundred cubic feet. Normally, sales revenue from the sawdust is $21,200 per month. The sawdust is charged to inventory at $2.20 per hundred cubic feet, although there is no direct cost to process it.

As an alternative, Highlands can rent equipment that will process the dust into imitation logs for fireplaces. These logs sell for $25.00 per hundred to wholesalers, who package and add scent to them. 75 logs can be produced from 100 cubic feet of sawdust. Cost of the equipment to produce these logs and the additional personnel required to operate the equipment are $360,000 per month, regardless of the output.

A) Should Highlands sell the sawdust for $1.00 per hundred cubic feet or process it into imitation logs? Support your answer with the appropriate calculations.

Explanation / Answer

As we know the sales revenue from selling the sawdust is $21200 per month without any cost hence it is considered as profit. For the other alternative of processing into imitation logs to be selected it should generate more profit.

Quantity of sawdust per month = Revenues / price = $21200 / $1 = 21200 hundred cubic feet

Number of logs that can be produced per month = 21200 x 75 = 1590000

Price per hundred logs = $25

Revenues from logs sales per month = 1590000 / 100 x 25 = $397500

Cost of producing logs per month = $360000

Profit from logs sales per month = 397500 – 360000 = $37500

which is higher than the revenues from selling sawdust at $1.00 per hundred cubic feet.

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