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The Big Bear Lumber Company is trying to decide whether to sell or process furth

ID: 2599261 • Letter: T

Question

The Big Bear Lumber Company is trying to decide whether to sell or process further rough-sawn lumber. The joint cost of producing the rough-sawn lumber is $10,500. The following data are available:

Lumber Type

Number of Boards

Selling Price per Board

Incremental Cost to Process Further

At Split-Off

After Additional Processing

A

2,000

$ 8

$12

$7,000

B

1,200

16

20

6,000

C

500

25

30

1,000

a. What is the incremental effect, increase or (decrease), on operating income of processing the lumber further of each lumber type?

b. Which type of lumber should be processed further?

Lumber Type

Number of Boards

Selling Price per Board

Incremental Cost to Process Further

At Split-Off

After Additional Processing

A

2,000

$ 8

$12

$7,000

B

1,200

16

20

6,000

C

500

25

30

1,000

Explanation / Answer

a.

b. A and C type of lumber should be processed further because they have increase in operating income if processed further.

Lumber Type Operating income At Split-Off Operating income After Additional Processing increase or (decrease) in operating income A 2,000 X 8 =$16,000 (2,000 X 12) - 7,000 = $17,000 $1,000 B 1,200 X 16 = $19,200 (1,200 X 20) - 6,000 = $18,000 ($1,200) C 500 X 25 = $12,500 (500 X 30) - 1,000 = $14,000 $1,500