EXERCISE 3

British Columbia Lumber has a raw lumber division and a finished lumber division. The variable costs are as follows:

• Raw lumber division: S100 per 100 boardfeet of raw lumber
• Finished lumber division: S125 per 100 board-feet of finished lumber

Assume that there is no boardfeet loss in processing raw lumber into finished lumber. Raw lumber can be sold at S200 per 100 boardfeet. Finished lumber can be sold at $275 per 100 board-feet.

1. Should British Columbia Lumber process raw lumber into its finished form? Show your calculations.
2. Assume that internal transfers are made at 110% of variable cost. Will each division maximize its division operating-income contribution by adopting the action that is in the best interest of British Columbia Lumber as a whole? Explain.
3. Assume that internal transfers are made at market prices. Will each division maximize its division operating-income contribution by adopting the action that is in the best interest of British Columbia Lumber as a whole? Explain.