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Nova Scotia Lumber has a raw lumber division and a finished lumber division. The variable costs are as follows: Raw lumber division: $100 per
Nova Scotia Lumber has a raw lumber division and a finished lumber division. The variable costs are as follows: Raw lumber division: $100 per 100 board-feet of raw lumber Finished lumber division: $110 per 100 board-feet of finished lumber Assume that there is no board-feet loss in processing raw lumber into finished lumber. Raw lumber can be sold at $200 per 100 board-feet. Finished lumber can be sold at $360 per 100 board-feet. Read the requirements. Requirement 1. Should Nova Scotia Lumber process raw lumber into its finished form? Show your calculations. Begin by selecting the formula you will use to make your decision. Then enter the amounts in the formula. (Use parentheses or a minus sign when entering losses.) Incremental revenues $ 160 Based on above, Nova Scotia Lumber should Incremental costs 110 = Gain/(loss) on further processing = $ 50 process raw lumber into its finished form. Requirement 2. Assume that internal transfers are made at 130% of variable cost. Will each division maximize its division operating-income contribution by adopting the action that is in the best interest of Nova Scotia Lumber as a whole? Explain. Begin by calculating each division's operating income under both actions. Start with the decision to sell as raw lumber. (Round your answers to the nearest whole dollar. Enter a "0" for amounts with a zero value. Use parentheses or a minus sign when entering losses.) Sell as Sell as finished lumber raw lumber Raw lumber division: Division revenues $ 200 $ 130 100 100 Division variable costs $ 100 30 Division operating income (loss) Finished lumber division: Division revenues $ 0 $ 360 Transferred-in costs 130 0 110 Division variable costs $ 0 $ 120 Division operating income (loss) Will each division maximize its division operating-income contribution by adopting the action that is in the best interest of Nova Scotia Lumber as a whole? Explain. The raw lumber division will maximize reported division operating income by The finished lumber division will maximize division operating income by which which the action preferred by the company as a whole. the action preferred by the company as a whole.
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