Lacerna Chemical has spent $245,000 to refine 70,000 gallons of acetone, which can be sold for $1.90 a gallon. Alternatively, Lacerna Chemical can process the acetone further. This processing will yield a total of 65,000 gallons of lacquer thinner that can be sold for $3.30 a gallon. The additional processing will cost $0.65 per gallon of lacquer thinner. To sell the lacquer thinner, Lacerna Chemical must pay shipping of $0.22 a gallon and administrative expenses of $0.13 a gallon on the thinner.
Requirements
1. Identify the sunk cost. Is the sunk cost relevant to Lacerna's decision? Why or why not?
2. Should Lacerna sell the acetone as is or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives.