Question
Castillo Chemical has spent $239,000 to refine 71,000 gallons of acetone, which can be sold for $2.70 a gallon. Alternatively, Castillo Chemical can process the
Castillo
Chemical has spent
$239,000
to refine
71,000
gallons of acetone, which can be sold for
$2.70
a gallon. Alternatively,
Castillo
Chemical can process the acetone further. This processing will yield a total of
61,000
gallons of lacquer thinner that can be sold for
$3.40
a gallon. The additional processing will cost
$0.60
per gallon of lacquer thinner. To sell the lacquer thinner,
Castillo
Chemical must pay shipping of
$0.19
a gallon and administrative expenses of
$0.11
a gallon on the thinner.
...
Question content area top right
Part 1
Requirements
1. | Identify the sunk cost. Is the sunk cost relevant to Castillo's decision? Why or why not? |
2. | Should Castillo sell the acetone as is or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives. |
Question content area bottom
Part 1
Requirement 1. Identify the sunk cost. Is the sunk cost relevant to
Castillo's
decision? Why or why not?
The |
| is a sunk cost that |
| differ between alternatives of selling as is or processing | |||
further. Consequently, this sunk cost of |
| is |
| to the sell or process further decision. |
Part 2
Requirement 2. Should
Castillo
sell the acetone as is or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives. (Enter a "0" for any zero amounts. Use a minus sign or parentheses in the Difference column if the Sell As Is amount exceeds the Process Further amount.)
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| Sell | Process | |||
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| As Is | Further | Difference | ||
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Less: |
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Net benefit to operating income per batch |
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Part 3
Decision:
Sell acetone as is.
Process further into lacquer thinner.
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