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Calgary Lumber Company incurs a cost of $315 per hundred board feet (hbf) in processing certain "rough-cut" lumber, which it sells for $440 per hbf. An alternative is to produce a "finished-cut" at a total processing cost of $465 per hbf, which can be sold for $600 per hbf. a. Prepare a differential analysis dated March 15 on whether to sell rough-cut lumber (Alternative 1) or process further into finished-cut lumber (Alternative 2).

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Answer:

Calgary Lumber Company

Differential Analysis dated March 15:

                                     Alternative 1                   Alternative 2

                                Sell rough-cut Lumber     Process to finished-cut

Sales                             $440                                  $600

Cost of processing         315                                     465

Profit                             $125                                    $135

Choose Alternative 2.

Explanation:

Calgary Lumber Company's differential analysis is a tool that its management can use to decide the alternative to pursue by examining the differences in the outcomes of two or more alternative actions.  From the analysis done between the two alternatives open to Calgary, it appears that the second alternative will yield a higher profit of $135 instead of alternative 1's profit of $125.  There is a differential profit of $10 per hundred board feet to be made if Calgary Lumber Company pursues alternative 2 instead of alternative 1.

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