Donder Milling Company purchases logs and mills them into various grades of lumber. During the sawing and planning process, a considerable amount of sawdust is generated. Currently, Donder sells the sawdust to a particle board manufacturer for $50 per truckload. Donder is considering processing the sawdust into particle board itself. One truckload of sawdust can be made into 20 sheets of particle board selling for $8 per sheet. Further processing costs are $7 per board.
-Refer to the Figure.Assume that the cost of logs falls by half.Should Donder sell the sawdust at split-off or process it further,and what is the effect on income?
A)Process further; the reduction in the cost of logs makes that option more profitable than it was before.
B)Sell at split-off; the decrease in the cost of the logs makes that option more profitable than it was before.
C)Sell at split-off; the reduction in the cost of the logs is irrelevant.
D)Process further; the reduction in the cost of the logs will lower further processing costs.

Question

Quizplus · Accepted Answer

The decision to sell the sawdust at split-off or process it further is based on the incremental revenue and costs associated with further processing. The cost of logs is a sunk cost at the point of deciding what to do with the sawdust and does not affect the incremental analysis for further processing versus selling at split-off.

Donder Milling Company Purchases Logs and Mills Them into Various