Sierra Wood Products, Inc., operates a sawmill facility. The company accounts for the bark chips that result
Question:
Sierra Wood Products, Inc., operates a sawmill facility. The company accounts for the bark chips that result from the primary sawing operation as a by-product. The chips are sold to another company at a price of $6 per hundred cubic feet. Normally, sales revenue from this bark is $450,000 per month. There is no direct cost of processing bark chips.
As an alternative, the company can rent equipment that will process the chips and bag them for sale as horticultural bark. Approximately 30 percent of the bark will be graded "large" and will sell for $16 per hundred cubic feet. About 60 percent will be graded "medium" and will sell for $8 per hundred cubic feet. The remainder will be mulch and will sell for $2 per hundred cubic feet.
Costs of the equipment to process and bag chips and the personnel to operate the equipment are $260,000 per month and are fixed regardless of the quantities of bark processed.
Should the company sell the bark for $6 per hundred cubic feet or process it further
(assuming a typical month)?
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