Question

Stenback Chemical has spent $243,000 to refine 70,000 gallons of Requirements acetone, which can be sold for $2.50 a gallon. Alternatively, Stenback 1. Identify the sunk cost. Is the sunk cost relevant to Stenbacks Chemical can process the acetone further. This processing will yield a total of 64,000 gallons of lacquer thinner that can be sold for $3.10 a gallon. The additional processing will cost $0.75 per gallon of lacquer thinner. To sell the lacquer thinner, Stenback Chemical must pay shipping of SO.19 a gallon and administrative expenses of $0.10 a gallon on the thinner decision? Why or why not? 2. Should Stenback sell the acetone as is or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives. is a sunk cost that The differ between alternatives of selling as is or processing further. Consequently, this sunk cost of $ to the sell or process further decision IS Requirement 2. Should Stenback sell the acetone as is or process it into lacquer thinner? Show the expected net revenue difference between the two alternatives. (Enter a "O" 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 Decision

Answer 1

Solution

Stenback Chemical

1. The amount spent to refine acetone is a sunk cost that does not differ between alternatives of selling as is or processing further. Consequently, this sunk cost of $243,000 is irrelevant to the sell or process further decision.

1. Determination of expected net revenue difference between the two alternatives – sell as is or process further:

Stenback Chemical
	Sell as is	Process Further	Difference between alternatives
Expected revenue	$175,000	$198,400	$23,400
Less: Additional costs		($66,560)	$66,560
Net benefit to operating income per batch	$175,000	$131,840	$43,160

Decision – sell acetone as is.

Explanation: the net revenue under the alternative 1, sell as is $175,000 is higher than the alternative 2, Process further $131,840 by $43,160. Hence, the decision is to choose alternative 1, sell as is.

Revenue from sale of 70,000 gallons of acetone at $2.50 per gallon = 70,000 x $2.50 = $175,000

Revenue from sale of 64,000 gallons of lacquer thinner at $3.10 per gallon = $198,400

Additional expenses to process lacquer thinner per gallon = $0.75 + $0.19 + $0.10 = $1.04

For 64,000 gallons = 64,000 x $1.04 = $66,560

Net difference between incomes = 175,000 – 131,840 = $43,160