Hawthorne and Sons (H&S) is a lumber mill in Virginia that produces rough-cut boards and then runs the boards through a sequence of machines to create green (uncured) lumber of different dimensions.

Then 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 fixed costs of $75,000 and variable costs of $4.50 per bundle of planks. Choosing this option would also require transportation of the boards in both directions—to the second lumber mill for coating, and then back to H&S for packaging and customer delivery. H&S has estimated this transport cost at $0.50 per bundle. If H&S chooses 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 is 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?