Root Chemical has spent $244,000 to refine 70,000 gallons of acetone, which can be sold for $2.30 a gallon. Alternatively, Root Chemical can process the acetone further. This processing will yield a total of 60,000 gallons of lacquer thinner that can be sold for $3.00 a gallon. The additional processing will cost $0.60 per gallon of lacquer thinner. To sell the lacquer thinner, Root Chemical must pay shipping of $0.19 a gallon and administrative expenses of $0.11 a gallon on the thinner.
Requirements
1. Diagram Root's decision.
2. Identify the sunk cost. Is the sunk cost relevant to Root's decision? Why or why not?
3. Should Root sell the acetone or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives.