(L.OBJ. 4) Making sell as ¡s or process further decisions [20—25 min]
Rouse Petroleum has spent $201,000 to refine 64,000 gallons of petroleum distillate, which can be sold for $6.00 a gallon. Alternatively, Rouse can process the distillate further and produce 57,000 gallons of cleaner fluid. The additional processing will cost $1.70 per gallon of distillate. The cleaner fluid can be sold for $9.20 a gallon. To sell the cleaner fluid, Rouse must pay a sales commission of $0.12 a gallon and transportation charge of $0.17 a gallon.
Requirements
1. Diagram Rouse’s decision alternatives, using Exhibit 1 9-25 as a guide.
2. Identify the sunk cost. Is the sunk cost relevant to Rouse’s decision?
3. Should Rouse sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.
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