Question

Please help me with the below question

Stenback Petroleum has spent $205,000 to refine 60,000 gallons of petroleum distillate, which can be sold for $6.10 a gallon. Alternatively, Stenback can process the distillate further and produce 56,000 gallons of cleaner fluid. The additional processing will cost $1.75 per gallon of distillate. The cleaner fluid can be sold for $9.20 a gallon. To sell cleaner fluid, Stenback must pay a sales commission of $0.13 a gallon and transportation charge of $0.19 a gallon

Requirements

1. Fill in the diagram for Stenback's alternatives

2, Identify the sunk cost. Is the sunk cost relevant to Stenback’s decision?

3. Should Stenback sea the petroleum distillate a process it into cleaner fluid? Show the expected net revenue difference between the two alternatives

Answer 1

Stenback Petroleum Requirement 1 Revenues from selling as is $366,000 (60,000 gal. x $6.10/gal.) Joint costs producing 60,000 gallons of petroleum distillate $(205,000) Cost of processing further $(122,920) (60,000 gal. x $1.75/gal.) + [56,000 gal. x ($0.13/gal. + $0.19/gal.)] Revenues from processing further $515,200 (56,000 gal. x $9.20/gal.) Requirement 2 The sunk cost is the $205,000 Stenback Petroleum has spent to refine the 60,000 gallons of petroleum distillate. Sunk costs are always irrelevant to sell or process further decisions. Requirement 3 Process Further Difference Sell 366000 Costs Expected revenue from selling 60,000 gallons at $6.10 each Expected revenue from selling 56,000 gallons at $9.20 each Additional cost of processing (60,000 gal. $1.75/gal.) + (56,000 gal. < ($0.13/gal. + $0.19/gal.)] Total net revenue 515200 -122920 149200 -122920 366000 392280 26280 Stenback Petroleum should t process further. If Stenback sells as petroleum distillate, net revenue will be $366,000. If Stenback processes further, the net revenue will be $392,280. Profits will increase by $26,280 by processing further.