Question
Castillo Chemical has spent $242,000 to refine 70,000 gallons of acetone, which can be sold for $2.50 a gallon. Alternatively, Castillo Chemical can process the
Castillo Chemical has spent $242,000 to refine 70,000 gallons of acetone, which can be sold for $2.50 a gallon. Alternatively, Castillo Chemical can process the acetone further. This processing will yield a total of 62,000 gallons of lacquer thinner that can be sold for $3.30 a gallon. The additional processing will cost $0.40 per gallon of lacquer thinner. To sell the lacquer thinner, Castillo Chemical must pay shipping of $0.25 a gallon and administrative expenses of $0.13 a gallon on the thinner. Requirement 1. Identify the sunk cost. Is the sunk cost relevant to Castillo's decision? Why or why not? 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. The is a sunk cost that further. Consequently, this sunk cost of is differ between alternatives of selling as is or processing to the sell or process further decision. 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.) Process Sell As Is Further Difference Less: Net benefit to operating income per batch Decision: Process further into lacquer thinner. Sell acetone as is
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