Cole Petroleum has spent $206,000 to refine 63,000 gallons of petroleum distillate, which can be sold for $6.30 a gallon. Alternatively, Cole can process the distillate further and produce 53,000 gallons of cleaner fluid. The additional processing will cost $1.80 per gallon of distillate. The cleaner fluid can be sold for $9.20 a gallon. To sell the cleaner fluid, Cole must pay a sales commission of $0.12 a gallon and a transportation charge of $0.15 a gallon.
Requirements
1. Diagram Cole’s decision alternatives, using Exhibit 20-26 as a guide.
2. Identify the sunk cost. Is the sunk cost relevant to Cole’s decision?
3. Should Cole sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.