Sell or process further decisions (Learning Objective 7)

Vision Chemical has spent $240,000 to refine 72,000 gallons of acetone, which can be sold for $2.16 a gallon. Alternatively, Vision Chemical can process the acetone further. This processing will yield a total of 60,000 gallons of lacquer thinner that can be sold for $3.20 a gallon. The additional processing will cost $0.62 per gallon of lacquer thinner. To sell the lacquer thinner, Vision Chemical must pay shipping of $0.22 a gallon and administrative expenses of $0.10 a gallon on the thinner.

Requirements 1. Diagram Vision’s decision, using Exhibit 8-23 as a guide.

2. Identify the sunk cost. Is the sunk cost relevant to Vision’s decision? Why or why not?

3. Should Vision sell the acetone or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives