Seminole Petroleum has spent ($ 200,000) to refine 60,000 gallons of petroleum distillate. Suppose Seminole can sell

Question:

Seminole Petroleum has spent $\$ 200,000$ to refine 60,000 gallons of petroleum distillate. Suppose Seminole can sell the distillate for $\$ 6$ a gallon. Alternatively; it can process the distillate further and produce 55,000 gallons of cleaner fluid. The additional processing will cost another $\$ 1.75$ per gallon of distillate. The cleaner fluid can be sold for $\$ 9$ a gallon. To sell cleaner fluid, Seminole must pay a sales commission of $\$ 0.10$ a gallon and a transportation charge of $\$ 0.15$ a gallon.

Requirements

1. Diagram Seminole's alternatives, using Exhibit 25-11 as a guide.

2. Identify: the sunk cost. Is the sunk cost relevant to Seminole's decision?

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

Exhibit 25-11