Castillo Petroleum has spent $208,000 to refine 64,000 gallons of petroleum distillate, which can be sold for $6.40 per gallon. Alternatively, Castillo can process the distillate further and produce 54,000 gallons of cleaner fluid. The additional processing will cost $1.80 per gallon of distillate. The cleaner fluid can be sold for $9.00 per gallon. To sell cleaner fluid, Castillo must pay a sales commission of $0.14 per gallon and a transportation charge of $0.19 per gallon. Read the requirements. Requirement 1. Fill in the diagram for Castillo's alternatives. Joint costs of producing 64,000 gallons of petroleum distillate Cost of processing further The Revenues from selling as is Revenues from processing further Requirement 2. Identify the sunk cost. Is the sunk cost relevant to Castillo's decision? is a sunk cost that differ between the alternatives of selling as is or processing further. Consequently, this sunk cost is sell-or-process-further decision. Requirement 3. Should Castillo sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives. (For the difference in total net revenue, use a parentheses or a minus sign if processing further will decrease total net revenue.) Expected revenue from selling 64,000 gallons of petroleum distillate Expected revenue from selling 54,000 gallons of cleaner fluid Additional costs of processing Total net revenue Decision: Sell As is Process Further Difference to the
Castillo Petroleum has spent $208,000 to refine 64,000 gallons of petroleum distillate, which can be sold for $6.40 per gallon. Alternatively, Castillo can process the distillate further and produce 54,000 gallons of cleaner fluid. The additional processing will cost $1.80 per gallon of distillate. The cleaner fluid can be sold for $9.00 per gallon. To sell cleaner fluid, Castillo must pay a sales commission of $0.14 per gallon and a transportation charge of $0.19 per gallon. Read the requirements. Requirement 1. Fill in the diagram for Castillo's alternatives. Joint costs of producing 64,000 gallons of petroleum distillate Cost of processing further The Revenues from selling as is Revenues from processing further Requirement 2. Identify the sunk cost. Is the sunk cost relevant to Castillo's decision? is a sunk cost that differ between the alternatives of selling as is or processing further. Consequently, this sunk cost is sell-or-process-further decision. Requirement 3. Should Castillo sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives. (For the difference in total net revenue, use a parentheses or a minus sign if processing further will decrease total net revenue.) Expected revenue from selling 64,000 gallons of petroleum distillate Expected revenue from selling 54,000 gallons of cleaner fluid Additional costs of processing Total net revenue Decision: Sell As is Process Further Difference to the
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Castillo Petroleum has spent $208,000 to refine 64,000 gallons of petroleum distillate, which can be sold for $6.40 per gallon. Alternatively, Castillo can process the distillate further and produce 54,000
gallons of cleaner fluid. The additional processing will cost $1.80 per gallon of distillate. The cleaner fluid can be sold for $9.00 per gallon. To sell cleaner fluid, Castillo must pay a sales commission of $0.14
per gallon and a transportation charge of $0.19 per gallon.
Read the requirements.
Requirement 1. Fill in the diagram for Castillo's alternatives.
Joint costs
of producing
64,000
gallons of
petroleum
distillate
The
Cost of
processing
further
Revenues from
selling as is
Requirement 2. Identify the sunk cost. Is the sunk cost relevant to Castillo's decision?
is a sunk cost that
Revenues from
processing
further
Decision:
Expected revenue from selling 64,000 gallons of petroleum distillate
Expected revenue from selling 54,000 gallons of cleaner fluid
Additional costs of processing
Total net revenue
differ between the alternatives of selling as is or processing further. Consequently, this sunk cost is
sell-or-process-further decision.
Requirement 3. Should Castillo sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives. (For the difference in total net revenue,
use a parentheses or a minus sign if processing further will decrease total net revenue.)
Sell As Is
Process
Further
to the
Difference
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