Castillo Petroleum has spent $201,000 to refine 62,000 gallons of petroleum distillate, which can be sold for $6.20 per gallon. Alternatively, Castillo can process the distillate further and produce 58,000 gallons of cleaner fluid. The additional processing will cost $1.65 per gallon of distillate. The cleaner fluid can be sold for $9.00 per gallon. To sell cleaner fluid, Castillo must pay a sales commission of $0.11 per gallon and a transportation charge of $0.16

per gallon.

Read the requirements

Question content area bottom Part 1 Requirement 1. Fill in the diagram for

Castillo's alternatives.

							Revenues from
							selling as is
	Joint costs		---------------------->				$
	of producing
	62,000
	gallons of
	petroleum
	distillate			Cost of			Revenues from
	$		-----	processing		-->	processing
				further			further
				$			$

1. Fill in the diagram for Castillo's alternatives.

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

3. Should Castillo sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.