Question

Wholesome Dairy processes milk. The cost of the milk processing is $1,330,000. Wholesome is looking to...

Wholesome Dairy processes milk. The cost of the milk processing is $1,330,000. Wholesome is looking to increase its net income and is exploring the possibility of expanding its products to include cream and/or ice cream. It takes 1 gallon of milk to make a half gallon of ice cream

Product Units Produced Selling Price Additional Processing costs
Milk 798,000 gallons $ 3.05 per gallon
Ice Cream ? 6.13 per half gallon $ 0.28 per half gallon

Required:

1. How many half gallons of ice cream can Wholesome make?

2. What are the additional processing costs to convert the milk to ice cream?

3. Should Wholesome sell the milk or process it further and sell ice cream?

Business   Accounting   
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Answer #1

Part 1) no. Of half gallons of ice cream= total milk gallons ÷ no. Of gallon for half gallon of ice cream

= 798000÷1

= 798000 half gallons of ice cream

Part 2)

Additional processing costs = half gallons of ice cream × additional processing costs per half gallons of ice cream

= 798000 × .28

= $ 223440

Part 3)

We have to calculate financial advantage or disadvantage of further processing of milk into ice cream

= revenue from ice cream - revenue loss of milk- additional costs

= 4891740 - 2433900 - 223440

= 2234400

Since their is financial advantage of further processing milk into ice cream

So

Whole some should process it further and sell ice cream

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