Preston Chemical has spent $243,000 to refine 73,000 L of acetone, which can be sold for $2.00/L. Alternatively, Preston Chemical can process the acetone further to yield a total of 58,000 L of lacquer thinner that can be sold for $3.30/L. The additional processing will cost $0.40/L of lacquer thinner. To sell the lacquer thinner, Preston Chemical must pay shipping of $0.24/L and administrative expenses of $0.14/L on the thinner.
Requirements
1. Fill in the diagram for Preston’s decision.
2. Identify the sunk cost. Is the sunk cost relevant to Preston’s decision? Why or why not?
3. Should Preston sell the acetone or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives.