EXERCISE 12–17 Sell or Process Further [LO2]
The Fraser Paper Company produces large rolls of white paper weighing 1,000 kilograms for wholesalers for $1,500 each. The wholesalers then cut the paper into standard-sized sheets and package it in 2-kilogram packages. These packages are sold to printers for $4 per pack- age. There is no waste in the cutting process. Fraser Paper currently produces 5 million kilo- grams of paper annually at a fixed cost of $1 million and a variable cost of $0.80 per kilogram.
If Fraser bypassed the wholesalers and cut its own paper for sale directly to printers, Fraser would have to add equipment and personnel with an annual fixed cost of $650,000. Incremental variable costs would be $0.10 per kilogram. Required:
Should Fraser cut its own paper or continue to sell to wholesalers?