(L.0BJ. 4) Make sell as is or process further decisions [20—25 min]
Castillo Petroleum has spent $205,000 to refine 64,000 gallons of petroleum distillate, which can be sold for $6.10 a gallon. Alternatively, Castillo can process the distillate further and produce 56,000 gallons of cleaner fluid. The additional processing will cost $1.70 per gallon of distillate. The cleaner fluid can be sold for $9.30 a gallon. To sell the cleaner fluid, Castillo must pay a sales commission of $0.11 a gallon and transportation charge of $0.18 a gallon.
Requirements
1. Diagram Castillo’s decision alternatives, using Exhibit 19-25 as a guide.
2. Identify the stink cost. Is the sunk cost relevant to Castillo’s decision?
3. Should Castillo sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.
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