McKnight Chemical has spent $242,000 to refine 74,000 gallons of acetone, which can be sold for $2.40 a gallon. Alternatively, McKnight Chemical can process the acetone further. This processing will yield a total of 65,000 gallons of lacquer thinner that can be sold for $3.50 a gallon. The additional processing will cost $0.60 per gallon of lacquer thinner. To sell the lacquer thinner, McKnight Chemical must pay shipping of $0.23 a gallon and administrative expenses of $0.13 a gallon on the thinner. Requirements 1.Fill in the diagram for McKnight's decision. 2.Identify the sunk cost. Is the sunk cost relevant to McKnight's decision? Why or why not? 3.Should McKnight sell the acetone or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives. Requirement 1. Fill in the diagram for McKnight's decision. Sell As Is $ L Acetone sales revenue Sunk cost of producing 74,000 gallons of acetone $ Cost of further processing Process Further Lacquer thinner sales revenue Requirement 2. The $ is a sunk cost that differ between the alternatives of selling as is or processing further. Consequently, this sunk cost is the sell-or-process-further decision. Requirement 3. Calculate the expected net revenue difference between the two alternatives. (Leave any unused cells blank.) Requirement 2. The $ is a sunk cost that V differ between the alternatives of selling as is or processing further. Consequently, this sunk cost is to the sell-or-process-further decision. Requirement 3. Calculate the expected net revenue difference between the two alternatives. (Leave any unused cells blank.) McKnight Chemical Sell As Is or Process Further Analysis Sell As Is Process Further Revenue from selling 74,000 gallons of acetone Revenue from selling 65,000 gallons of lacquer thinner Additional costs required to convert acetone to lacquer thinner Total net revenue Difference in net revenue Decision: McKnight Chemical has spent $242,000 to refine 74,000 gallons of acetone, which can be sold for $2.40 a gallon. Alternatively, McKnight Chemical can process the acetone further. This processing will yield a total of 65,000 gallons of lacquer thinner that can be sold for $3.50 a gallon. The additional processing will cost $0.60 per gallon of lacquer thinner. To sell the lacquer thinner, McKnight Chemical must pay shipping of $0.23 a gallon and administrative expenses of $0.13 a gallon on the thinner. Requirements 1.Fill in the diagram for McKnight's decision. 2.Identify the sunk cost. Is the sunk cost relevant to McKnight's decision? Why or why not? 3.Should McKnight sell the acetone or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives. Requirement 1. Fill in the diagram for McKnight's decision. Sell As Is $ L Acetone sales revenue Sunk cost of producing 74,000 gallons of acetone $ Cost of further processing Process Further Lacquer thinner sales revenue Requirement 2. The $ is a sunk cost that differ between the alternatives of selling as is or processing further. Consequently, this sunk cost is the sell-or-process-further decision. Requirement 3. Calculate the expected net revenue difference between the two alternatives. (Leave any unused cells blank.) Requirement 2. The $ is a sunk cost that V differ between the alternatives of selling as is or processing further. Consequently, this sunk cost is to the sell-or-process-further decision. Requirement 3. Calculate the expected net revenue difference between the two alternatives. (Leave any unused cells blank.) McKnight Chemical Sell As Is or Process Further Analysis Sell As Is Process Further Revenue from selling 74,000 gallons of acetone Revenue from selling 65,000 gallons of lacquer thinner Additional costs required to convert acetone to lacquer thinner Total net revenue Difference in net revenue Decision
