Click and Clack Recyclers buys used motor oil for $0.75 per gallon from shops that specialize in oil changes and other minor services for cars. The cost of transporting and refining the motor oil is $1.25 per gallon. The refined oil becomes commercial-grade motor oil and a thick residual fuel oil. Each gallon of used motor oil yields 0.7 gallon of commercial-grade motor oil and 0.3 gallon of residual fuel oil. Commercial-grade motor oil is sold for $3 per gallon, and residual fuel oil is sold for $1.50 per gallon.

REQUIRED

A. If the costs of purchasing and processing the used motor oil were allocated on the basis of their net realizable value, what would be the inventory cost per gallon of residual fuel oil?

B. If the costs of purchasing and processing the used motor oil were allocated on the basis of physical output, what would be the inventory cost per gallon of residual fuel oil?

C. With additional processing, residual fuel oil can be converted into Special Fuel Oil. The additional processing costs $0.40 per gallon. What would be the minimum acceptable price for the Special Fuel Oil?