Southern Sawmill, Inc., operates a sawmill facility that produces bark chips resulting from its primary sawing. The chips are sold to another company at a price of $12 per unit, where one unit refers to 100 cubic feet of bark. In a typical month, sales revenue from this bark is $900,000 (for a sale of 75,000 units).
As an alternative, the company can rent equipment that will process the chips and bag them for sale for landscaping. Approximately 30 percent of the bark will be graded ‘‘large’’ and will sell for $32 per unit. About 70 percent of the bark will be graded ‘‘medium’’ and will sell for $16 per unit.
Costs to rent the equipment to process and bag the bark and costs of the personnel to operate the equipment amount to a total of $520,000 per month. These costs are fixed regardless of the amount of bark processed. There are no variable costs to process the bark.
Assuming a typical month, should the company sell the bark for $12 per unit or process it further?