Question

Kyler Chemical has spent $244,000 to refine 70,000 gallons of​ acetone, which can be sold for $2.50 a gallon.​ Alternatively, Kyler Chemical can process the acetone further. This processing will yield a total of 64,000 gallons of lacquer thinner that can be sold for $3.20 a gallon. The additional processing will cost $0.75 per gallon of lacquer thinner. To sell the lacquer​ thinner, Kyler Chemical must pay shipping of $0.18 a gallon and administrative expenses of $0.12 a gallon on the thinner.

Requirements
1. Identify the sunk cost. Is the sunk cost relevant to Kyler​'s decision? Why or why​ not?

2. Should Kyler sell the acetone as is or process it into lacquer​ thinner? Show the expected net revenue difference between the two alternatives.

Requirement 1. Identify the sunk cost. Is the sunk cost relevant to Kyler​'s decision? Why or why​ not?

The	amount spent to refine the acetone	is a sunk cost that			does not		differ between alternatives of selling as is or processing
further. Consequently, this sunk cost of $		244,000	is	irrelevant		to the sell or process further decision.

Requirement 2. Should Kyler sell the acetone as is or process it into lacquer​ thinner? Show the expected net revenue difference between the two alternatives. ​(Enter a​ "0" 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
Sales revenue
Less:	Additional processing costs to convert lacquer thinner
Net benefit to operating income per batch

​

Answer 1

The amount spent to refine the acetone is a sunk cost
that does not differ
$244000 is irrelevant
	Sell as is	Process further	Difference
Sales Revenue	175000	204800	29800
Less: Additional Processing costs	0	67200	67200
Net Benefit to operating income	175000	137600	-37400
Should be sold as is