Chemical has spent $246,000 to refine 74,000 gallons of acetone, which can be sold for $2.60 a gallon. Alternatively, Castillo Chemical can process the acetone further. This processing will yield a total of 60,000 gallons of lacquer thinner that can be sold for $3.40 a gallon. The additional processing will cost $0.80 per gallon of lacquer thinner. To sell the lacquer thinner, Castillo Chemical must pay shipping of $0.24 a gallon and administrative expenses of $0.10 a gallon on the

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.