Castillo Chemical has spent $239,000 to refine 71,000 gallons of acetone, which can be sold for $2.70 a gallon. Alternatively, Castillo Chemical can process the acetone further. This processing will yield a total of 61,000 gallons of lacquer thinner that can be sold for $3.40 a gallon. The additional processing will cost $0.60 per gallon of lacquer thinner. To sell the lacquer thinner, Castillo Chemical must pay shipping of $0.19 a gallon and administrative expenses of $0.11 a gallon on the thinner.

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Part 1

Requirements

1.	Identify the sunk cost. Is the sunk cost relevant to Castillo's decision? Why or why not?
2.	Should Castillo sell the acetone as is or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives.

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Part 1

Requirement 1. Identify the sunk cost. Is the sunk cost relevant to

Castillo's

decision? Why or why not?

The		is a sunk cost that					differ between alternatives of selling as is or processing
further. Consequently, this sunk cost of			is			to the sell or process further decision.

Part 2

Requirement 2. Should

Castillo

sell the acetone as is or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives. (Enter a "0" for any zero amounts. Use a minus sign or parentheses in the Difference column if the Sell As Is amount exceeds the Process Further amount.)

			Sell	Process
			As Is	Further			Difference
Less:
Net benefit to operating income per batch

Part 3

Decision:

Sell acetone as is.

Process further into lacquer thinner.

Answer rating: 100% (QA)

The amount spent to refine acetone is a sunk cost that does n... View the full answer