Preston Petroleum has spent $200,000 to refine 61,000 gallons of petroleum distillate, which can be sold for $6.20 per gallon. Alternatively, Preston can process the distillate further and produce 57,000 gallons of cleaner fluid. The additional processing will cost $1.80 per gallon of distillate. The cleaner fluid can be sold for $9.20 per gallon. To sell cleaner fluid, Preston must pay a sales commission of $0.11 per gallon and a transportation charge of $0.17 per gallon. Read the requirements. Requirement 1. Fill in the diagram for Preston's alternatives. Revenues from selling as is Joint costs of producing 61,000 gallons of petroleum distillate Cost of processing further Revenues from processing further Preston Petroleum has spent $200,000 to refine 61,000 gallons of petroleum distillate, which can be sold for $6.20 per gallon. Alternatively, Preston can process the distillate further and produce 57,000 gallons of cleaner fluid. The additional processing will cost $1.80 per gallon of distillate. The cleaner fluid can be sold for $9.20 per gallon. To sell cleaner fluid, Preston must pay a sales commission of $0.11 per gallon and a transportation charge of $0.17 per gallon. Read the requirements. Requirement 2. Identify the sunk cost. Is the sunk cost relevant to Preston's decision? The is a sunk cost that differ between the alternatives of selling as is or processing further. Consequently, this sunk cost is V to the sell-or-process-further decision. Requirement 3. Should Preston sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives. (For the difference in total net revenue, use a parentheses or a minus sign if processing further will decrease total net revenue.) Process Difference Expected revenue from selling 61,000 gallons of petroleum distillate Expected revenue from selling 57,000 gallons of cleaner fluid Additional costs of processing Sell As Is Further Total net revenue Decision: CE JELI llon. Alternatively, Preston can process the distillate further and produce 57,000 g ocessing will cost $1.80 per gallon of distillate. The cleaner fluid can be sold for $5 eston must pay a sales commission of $0.11 per gallon and a transportation charg ead the requirements. equirement 2. Identify the sunk cost. Is the sunk cost relevant to Preston's decisic he is a sunk cost that tis V to the $125,760 cost of further processing eqi ver process it into cleane rence in total net reve $200,000 spent to refine the petroleum distillate gn ons of petroleum distillate, rand produce 57,000 gallons of cleaner fluid. The - fluid can be sold for $9.20 per gallon. To sell clear d a transportation charge of $0.17 per gallon. ant to Preston's decision? Funk cost that differ between the alterna st is rocess-further dec does or process it in ference in tota Show the expected a parentheses or does not Process elevant to Preston's decision? a sunk cost that differ between Ak cost is to the sell-or-process-1 late or pro fluid? Show the ue, use a parer e differenc irrelevant ) relevant Proce Sell As Is Furth eum distillate er fluid Expected revenue from selling 61,000 gallons of petrole Expected revenue from selling 57,000 gallons of cleane Additional costs of processing Total net revenue ecision: ter any Process further into cleaner continue Sell as is ng will cost $1.80 per gallon of distillate. The cleaner fluid can be sold for $9.20 per gallon. To sell cleane must pay a sales commission of $0.11 per gallon and a transportation charge of $0.17 per gallon. e requirements. ment 2. Identify the sunk cost. Is the sunk cost relevant to Preston's decision? * Requirements x jativ is is d cisi emen diffe roces dn ra 1. Fill in the diagram for Preston's alternatives. 2. Identify the sunk cost. Is the sunk cost relevant to Preston's decision? 3. Should Preston sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives. Diff ted re Print Done ted re onal costs of processing
