Cole Chemical has spent $245,000 to refine 71,000 gallons of acetone, which can be sold for $2.40 a gallon. Alternatively, Cole Chemical can process the acetone further. This processing will yield a total of 62,000 gallons of lacquer thinner that can be sold for $3.50 a gallon. The additional processing will cost $0.85 per gallon of lacquer thinner. To sell the lacquer thinner, Cole Chemical must pay shipping of $0.23 a gallon and administrative expenses of $0.13 a gallon on the thinner. Requirements 1. Identify the sunk cost. Is the sunk cost relevant to Cole's decision? Why or why not? 2. Should Cole 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 Cole's decision? Why or why not? is a sunk cost The amount spent to refine the acetone that does not further. Consequently, this sunk cost of $ 245,000 is irrelevant differ between alternatives of selling as is or processing to the sell or process further decision. Requirement 2. Should Cole 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.) Sales revenue Less: Additional processing costs to convert lacquer thinner Net benefit to operating income per batch Sell As Is Process Further Difference
Cole Chemical has spent $245,000 to refine 71,000 gallons of acetone, which can be sold for $2.40 a gallon. Alternatively, Cole Chemical can process the acetone further. This processing will yield a total of 62,000 gallons of lacquer thinner that can be sold for $3.50 a gallon. The additional processing will cost $0.85 per gallon of lacquer thinner. To sell the lacquer thinner, Cole Chemical must pay shipping of $0.23 a gallon and administrative expenses of $0.13 a gallon on the thinner. Requirements 1. Identify the sunk cost. Is the sunk cost relevant to Cole's decision? Why or why not? 2. Should Cole 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 Cole's decision? Why or why not? is a sunk cost The amount spent to refine the acetone that does not further. Consequently, this sunk cost of $ 245,000 is irrelevant differ between alternatives of selling as is or processing to the sell or process further decision. Requirement 2. Should Cole 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.) Sales revenue Less: Additional processing costs to convert lacquer thinner Net benefit to operating income per batch Sell As Is Process Further Difference
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Cole Chemical has spent $245,000 to refine 71,000 gallons of acetone, which can be sold for
$2.40 a gallon. Alternatively, Cole Chemical can process the acetone further. This processing will
yield a total of 62,000 gallons of lacquer thinner that can be sold for $3.50 a gallon. The additional
processing will cost $0.85 per gallon of lacquer thinner. To sell the lacquer thinner, Cole Chemical
must pay shipping of $0.23 a gallon and administrative expenses of $0.13 a gallon on the thinner.
Requirements
1. Identify the sunk cost. Is the sunk cost relevant to Cole's decision? Why or why not?
2. Should Cole 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 Cole's decision? Why or why not?
is a sunk cost
The amount spent to refine the acetone that
does not
further. Consequently, this sunk cost of
$ 245,000 is
irrelevant
differ between alternatives of selling as is or processing
to the sell or process further decision.
Requirement 2. Should Cole 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.)
Sales revenue
Less:
Additional processing costs to convert lacquer thinner
Net benefit to operating income per batch
Sell
As Is
Process
Further
Difference
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