The Big Bear Lumber Company Is Trying to Decide Whether

question 65

Essay

The Big Bear Lumber Company is trying to decide whether to sell or process further rough-sawn lumber.The joint cost of producing the rough-sawn lumber is $10,500.The following data are available:
$$\begin{array} { | c | c | c | c | c | } \hline \begin{array}{c}\text { Lumber } \\\text { Type }\end{array} & \text { Number of Boards } & \text { Selling Price per Board }&& \begin{array}{c}\text { Incremental } \\\text { Cost to Process } \\\text { Further }\end{array} \\\hline &&\text { At Split-Off } & \begin{array}{c}\text { After } \\\text { Additional } \\\text { Processing }\end{array} \\\hline \text { A } & 2,000 & \$ 8& \$ 12 & \$ 7,000 \\\hline \text { B } & 1,000 & \$ 8 & 20 & 6,000 \\\hline \text { C } & 500 & 16 & 30 & 1,000 \\\hline\end{array}$$
a. What is the incremental effect, increase or (decrease), on operating income of processing the lumber further?
b. Which type of lumber should be processed further?

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Definitions:

Process Capability Index

A statistical measure that quantifies how well a process can produce output within given specification limits.

Specification Limit

Predetermined bounds within which a product or process’s performance must fall to be considered acceptable, often used in quality control.

Standard Deviation

A statistic that measures the dispersion or spread of a set of numbers.

Process Capability Index

A statistical measure that quantifies how well a process is able to produce output within specified limits.