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Identify the sunk cost

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Reference no: EM132515439

Noble Chemical has spent $240,000 to refine 71,000 gallons of acetone, which can be sold for $2.30 a gallon. Alternatively, Noble Chemical can process the acetone further. This processing will yield a total of 59,000 gallons of lacquer thinner that can be sold for $3.20 a gallon. The additional processing will cost $0.85 per gallon of lacquer thinner. To sell the lacquer thinner, Noble Chemical must pay shipping of $0.24 a gallon and administrative expenses of $0.12 a gallon on the thinner.

Requirements

Question 1. Identify the sunk cost. Is the sunk cost relevant to Noble's decision? Why or why not?

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

Reference no: EM132515439

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