Question

Washington hardwoods produces multiple products from a shared production process, including wood shavings and wood veneer. up to the split-off point for these two products, the joint costs associated with their shared processes total $16 million per year. wood shavings can be sold for $9 million in annual revenue, and wood veneer can be sold for $30 million in annual revenue. wood shavings can be processed further into pellets at a cost of $10 million, which can then be sold for $25 million. wood veneer can be processed further into paneling at a cost of $11 million, which can then be sold for $39 million.

1. the amount by which operating income will increase if wood shavings are processed further into wood pellets is $____ million.

Answer 1

The operating income will increase by $6 million if Washington Hardwoods processes wood shavings further into pellets, after factoring in the additional costs and revenue associated with further processing.

Step-by-step explanation:

The increase in operating income resulting from processing wood shavings further into wood pellets can be determined by analyzing the additional revenue and costs associated with the processing.

1. **Additional Revenue:**

- The direct sale of wood shavings generates revenue of $9 million.

- Processing wood shavings into wood pellets allows for the sale of the processed product at $25 million.

Therefore, the incremental revenue from processing wood shavings into pellets is $25 million - $9 million = $16 million.

2. **Additional Cost:**

- The cost of further processing wood shavings into wood pellets is $10 million.

Now, subtracting the additional cost from the incremental revenue provides the net increase in operating income:

$16 million - $10 million = $6 million.

In summary, if the company decides to process wood shavings further into wood pellets, there would be a net increase in operating income of $6 million. This analysis considers the additional revenue generated by selling the processed product and offsets it against the cost associated with the further processing. It is essential for decision-making processes to evaluate both the financial gains and costs associated with alternative production methods.