Question
F#2 McKnight Chemical has spent $242,000 to refine 73,000 gallons of acetone, which can be sold for $2.20 a gallon. Alternatively, McKnight Chemical can process
F#2
McKnight
Chemical has spent
$242,000
to refine
73,000
gallons of acetone, which can be sold for
$2.20
a gallon. Alternatively,
McKnight
Chemical can process the acetone further. This processing will yield a total of
59,000
gallons of lacquer thinner that can be sold for
$3.40
a gallon. The additional processing will cost
$0.50
per gallon of lacquer thinner. To sell the lacquer thinner,
McKnight
Chemical must pay shipping of
$0.22
a gallon and administrative expenses of
$0.15
a gallon on the thinner.
.....
Requirements
1. | Identify the sunk cost. Is the sunk cost relevant to McKnight's decision? Why or why not? |
2. | Should McKnight sell the acetone as is or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives. |
Requirement 1. Identify the sunk cost. Is the sunk cost relevant to
McKnight'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. |
Requirement 2. Should
McKnight
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 | |||
|
|
| As Is | Further | Difference | ||
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|
|
|
|
| ||
Less: |
|
|
|
|
|
| |
Net benefit to operating income per batch |
|
|
|
|
|
Decision:
Process further into lacquer thinner.
Sell acetone as is.
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