Question

Sell or Process Further Portland Lumber Company incurs a cost of $452 per hundred board feet (hbf) in processing certain "rough-cut" lumber, which it sells for $611 per hbf. An alternative is to produce a "finished cut" at a total processing cost of $559 per hbf, which can be sold for $748 per hbf. Prepare a differential analysis dated June 14, on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

Answer 1

To compare each alternative, we have t compare the contribution margin ratio.

Aternative "rought-out" = 26.02%

For every 100 dollars of sales the company will keep $26.02 to pay the fixed cost and make a gain.

Alternative "finished cut" = 25.27%

For every 100 dollars of sales the company will keep $25.27 to pay the fixed cost and make a gain.

It is a better option to sell rought-out lumber

Step-by-step explanation:

Aternative "rought-out"

611 sales

452 variable cost

`Sales \: Revenue - Variable \: Cost = Contribution \: Margin`

`(Contribution Margin)/(Sales Revenue) = $Contribution Margin Ratio`

611 - 452 = 159

159/611 = 26.0229132%

Alternative "finished cut"

748 sales

559 variable cost

`Sales \: Revenue - Variable \: Cost = Contribution \: Margin`

`(Contribution Margin)/(Sales Revenue) = $Contribution Margin Ratio`

748 - 559 = 189

189/748= 25.2673796%