Question

Primrose Yard receives 15,000 large trees each year that they process into 15,000 rough logs. Currently, Primrose sells the rough logs for $50 each. Primrose is considering processing the logs further into refined lumber.
Each log can be processed into 350 feet of refined lumber at an additional cost of $0.20 per foot. The refined lumber can be sold for $0.80 per foot.

Assume that the cost of getting the 15,000 large trees falls by half.

Should Primrose sell the rough logs at split-off or process it further?

a. It should sell at split-off because the decrease in cost price will increase the selling price of the logs.

b. It should sell at split-off because the reduction in the cost of the trees is irrelevant.

c. It should process further because the reduction in the cost of the trees is irrelevant.

d. It should process further because the reduction in the cost of trees makes that option more profitable than it was before.

e. It should process further because the cost reduction will decrease the processing cost.

Answer 1

Answer:

c. It should process further because the reduction in the cost of the trees is irrelevant.

Explanation:

For the purpose of this Decision,

Benefit of processing further = Sales Value after processing – Sale Value before processing – Further Processing costs

Cost of acquiring trees is a sunk cost already incurred and hence is not relevant

Hence, benefit of processing = (0.80-0.20)*350 – 50

= $160

Hence, the answer is

c. It should process further because the reduction in the cost of the trees is irrelevant.