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.

	Grade A		Grade B			Bark and Shavings			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	2,340			860			0			3,200
Sanding	4,320			3,380			0			7,700
Shipping	1,550			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	$