Vision Chemical has spent $240,000 to refine 72,000 L of acetone, which can be sold for $2.16/L. Alternatively, Vision Chemical can process the acetone further to yield a total of 60,000 L of lacquer thinner that can be sold for $3.20/L. The additional processing will cost $0.62/L of lacquer thinner. To sell the lacquer thinner, Vision Chemical must pay shipping of $0.22/L and administrative expenses of $0.10/L on the thinner.
Requirements
1. Diagram Vision’s decision, using Exhibit 8-23 as a guide.
2. Identify the sunk cost. Is the sunk cost relevant to Vision’s decision? Why or why not?
3. Should Vision sell the acetone or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives.