Question

P8-53A

P8-53A Sell as is or process further decisions (Learning Objective 7) Noble Chemical has spent $240,000 to refine 71,000 gallons of acetone, which can be sold for $2.30 a gallon. Alternatively, Noble Chemical can process the acetone further. This processing will yield a total of 59,000 gallons of lacquer thinner that can be sold for $3.20 a gallon. The additional processing will cost $0.85 per gallon of lacquer thinner. To sell lacquer thinner, Noble Chemical must pay shipping of $0.24 a gallon and administrative expenses of $0.12 a gallon on the thinner. Requirements 1. Indentify the sunk cost. Is the sunk cost relevant to Noble's decisions? Why or why not? 2. Should Noble sell the acetone as is or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives.

Answer 1

1. The $240000 spent to refine the acetone is the sunk cost. This sunk cost is irrelevant to Noble's decisions since it is a cost that has already been incurred and hence does not affect the decision of whether to sell as is or process further.

2.

	Sell As Is	Process Further	Differential Net Income Increase (Decrease)
Sales	163300	188800	25500
	(71000 x $2.30)	(59000 x $3.20)
Additional processing cost	0	50150	-50150
		(59000 x $0.85)
Shipping costs	0	14160	-14160
		(59000 x $0.24)
Administrative expense	0	7080	-7080
		(59000 x $0.12)
Net income	163300	117410	-45890

Noble should sell the acetone as is without further processing.