Discard or Process Further

Tembec buys pine logs and saws them into boards of two grades: A and B. The grade is determined by factors such as the number of knotholes and quality of the grain. Bark and shavings are also produced as a result of the sawing operation. On average, a log yields 35 percent A-grade boards, 55 percent B-grade boards, and 10 percent bark and shavings. Charles Merchant, the owner, just received the income statement for the sawmill, shown below, which represents a typical month's operations. Charles expects similar results in the foreseeable future.

Sawing costs include wages, depreciation, and other non-itemized costs of running the sawmill. The costs of logs and of sawing were allocated according to volume (35 percent, 55 percent, 10 percent). Trimming, sanding, and shipping costs were direct and avoidable. Charles was disturbed at the results. He told an employee, The bark and shavings are really hurting me. I'd be better off throwing the stuff out.

Bark and Shavings Grade A Grade B Total Sales $36,000 $41,000 $3,000 $80,000 Costs: Logs 14,700 23,100 4,200 42,000 Sawing 5,950 9,350 1,700 17,000 Trimming 860 2,340 4,320 1,550 0 0 3,200 7,700 Sanding 3,380 Shipping 2,430 520 4,500 Total costs 28,860 39,120 6,420 74,400 Income (loss) $7,140 $1,880 $(3,420) $5,600 Required: 1. Should Charles throw away the bark and shavings? Provide a financial analysis of the effect on Charles's profit if the bark and shavings are thrown out rather than sold. Financial Analysis Loss of sales Savings from avoidable costs Loss of profit