A lumber mill in Virginia, Hawthorne and Sons (H&S), produces rough-cut boards and then runs the boards through a sequence of machines to create green (uncured) lumber of different dimensions. Finally, the boards are kiln-dried to become building products. H&S also owns a piece of equipment that applies a coating to some of the boards to produce prefinished flooring. The fixed costs of this machine are $145,000 a year and the variable costs are $4.50 per bundle of planks. Another lumber mill in the same Virginia county is willing to apply this finish to H&S’s boards for $75,000 in fixed costs and $4.50 per bundle of planks. Unfortunately, choosing this option would also require transportation of the boards in each direction—to the second lumber mill for coating, and then back to H&S for packaging and customer delivery. H&S estimated this transport cost at $0.50 per bundle. If H&S chose to outsource, it could also sell its coating machine at salvage for a one-time sale price of $150,000. Demand for the bundles of planks was expected to be 130,000.

a) Calculate the annual cost of the current process used at H&S.

b) Calculate the annual cost if the second lumber mill applies the coating.

c) Find the indifference point for these two alternatives.

d) How much of a change in demand is needed to justify outsourcing the process?