Sell or process further decision (Learning Objective 7)} Acme Petroleum has spent ($ 200,000) to refine 60,000

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Sell or process further decision (Learning Objective 7)}

Acme Petroleum has spent \(\$ 200,000\) to refine 60,000 gallons of petroleum distillate. Suppose Acme Petroleum can sell the distillate for \(\$ 6\) a gallon. Alternatively, it can process the distillate further and produce 60,000 gallons of cleaner fluid. The additional processing will cost another \(\$ 1.75\) a gallon, and the cleaner can be sold for \(\$ 8.50\) a gallon. To sell cleaner fluid, Acme Petroleum must pay a sales commission of \(\$ 0.10\) a gallon and a transportation charge of \(\$ 0.15\) a gallon.

\section*{Requirements}

1. Diagram Acme Petroleum's alternatives, using Exhibit 8-23 (sell as is or process further) as a guide.

2. Identify the sunk cost. Is the sunk cost relevant to Acme Petroleum's decision? Why or why not?

3. Prepare an analysis to indicate whether Acme Petroleum should sell the distillate or process it into cleaner fluid. Show the expected net revenue difference between the two alternatives.

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Financial Accounting

ISBN: 9780131492011

1st Edition

Authors: Jane L. Reimers

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