Question

Structuring the Sell-or-Process-Further Decision Jack's Lumber Yard receives 8,000 large trees each period that it subsequently processes into rough logs by stripping off the tree bark and leaves. Jack’s then must decide whether to sell its rough logs (for use in log cabin construction) at split-off or to process them further into refined lumber (for use in regular construction framing). Jack's normally sells logs for a per-unit price of $500. Alternately, each log can be processed further into 800 board feet of lumber at an additional cost of $0.05 per board foot. Also, lumber can be sold for $0.75 per board foot. (Note: One tree is equal to one rough log.) Required: 1. What is the total contribution to income from selling the logs for log cabin construction? $ 2. What is the total contribution to income from processing the logs into lumber? $ 3. Should Jack's continue to sell the logs or process them further into lumber?

Answer 1

1. $4,000,000

2. $4,480,000

3. Jack's continue to process them further into lumber.

Step-by-step explanation:

1. Total contribution to income from selling the logs for log cabin construction:

= No. of large trees receives each period × Selling price per-unit

= 8,000 × $500

= $4,000,000

2. Total contribution to income from processing the logs into lumber:

= 8,000 × 800 × ($0.75 - $0.05)

= 8,000 × 800 × 0.70

= $4,480,000

3. Jack's continue to process them further into lumber only, because income from processing it as lumber is greater than log.